Low Interest Rates: The New Normal? (Hint: No)

Low Interest Rates: The New Normal? (Hint: No)

We’ve been thinking a lot lately what direction mortgage interest rates may be headed and also what if anything would represent a “normal” mortgage rate if there ever was such a thing.

In December, real estate brokerage Redfin posted data showing a combined 83% of survey respondents considered a “normal” rate for a 30-year fixed rate mortgage to fall under 5% (seen in the screenshot below). As mortgage professionals, we believe these low rates to be “once in a lifetime” rather than normal.

As the survey authors evidence, not until March 2009 had mortgage rates ever been below 5%. Since 1990, interest rates have averaged 6.7%.

Here at the office, this research served to freshen our somewhat fading memories – one of our officers brought up the fact that in the 1980s, interest rates were in the high teens – yes, 16, 17 and 18 percent!

This got us to wondering what things looked like going back even further. We found that Freddie Mac has been tracking mortgage rates since 1972; you can see their data in the graph below.

Doing some simple number crunching, we learned that the average rate from 1972 to 2013 is 8.8%. Not bad – but hardly “low” compared to today’s rates.

Even more interesting, however, is that during this 41 year period, we had 13 consecutive years where the rate was 10% and above (1978 – 1990). That’s a third of the entire period!

Why we have low rates today

One of the many reasons mortgage rates go up and down is due to actions by the Federal Reserve. In 1990, for example, Federal Reserve Chairman Alan Greenspan lowered interest rates in an attempt to keep the country from slipping into a recession.

When Greenspan lowered interest rates in 1990, this action reduced the return on savings. To offset income losses, people began investing in the stock market.

This increased stock market activity, when coupled with the dotcom boom, created a bubble. Suddenly, internet companies with little to no actual revenues had market valuations in the billions of dollars. Many of these companies went belly up and the stock market bubble burst in 2000. Subsequent events, including the September 11, 2001 terrorist attacks, plunged the country into recession.

In order to offset these events and prevent a recession, the Fed began incrementally lowering a key interest rate used between banks, from January 2001 to June 2003. During this period, the housing market began picking up quite a bit of steam.

With rates so low, investment banks looking for profits turned to certain securities tied to real estate prices. Unfortunately, the housing bubble did what bubbles do and burst – leading to the Global Financial Crisis of 2007 – 2008.

In response to the financial crisis, the Fed introduced additional policies engineered to keep rates artificially low in an effort to ease credit and further stimulate the economy.

Financial experts believe the Fed is expected to wean the country off these artificially low rates through 2014 using a policy called Quantitative Easing.

Are today’s low rates “normal”?

Based on the data and history itself, 4 – 5% mortgage rates are anything but normal. What is normal? It’s hard to say.

The high rates of the 1980s can’t be considered normal and the 2000s had too many catastrophic events (dot com bust, housing crash, etc.) to be considered normal.

We could look at rates going back even further than 1972, but then we’re not comparing apples to apples. In the early part of the 1900s, the government didn’t back mortgages; to qualify, you had to put down 50% and the loan term was 10 or 20 years.

That leaves the 1990s. Under President Clinton (1993 – 2001), the economy was quite robust. Mortgage rates hovered at 8% (eight year average: 7.75%).

Based on this historical data of mortgage rates, I would say 6-7% would be considered a normal range, if not a touch higher even. In fact, the average rate from 1972 to today is 8.8%.

Today’s rates are definitely low – and they’ve even gone up some. However, even if rates do go up to 6, 7 or 8% we could still consider that to be low given the data for the last 41 years.

By readjusting your idea of “low,” you can tune out the “buy now!” calls you see everywhere. With the Fed doing Quantitative Easing, rates aren’t expected to shoot up over the course of the next year. Waiting six, 12 or even 18 months isn’t going to cost you all that much money over the long-term – relatively speaking.

If a new home isn’t in your future for a year or two, don’t worry about missing out on historically low rates. As I’ve said, anything below 8% is historically low and should be considered a great rate!

If you need a home mortgage, or you want to refinance the home you’re in, give us a call. One of our Loan Officers will work with you to find the best loan product to suit your situation.

Mortgage Rates Still Low Refinance Soon

Mortgage Rates Still Low Refinance Soon

Although they’re pretty low, mortgage rates aren’t at their lowest point again. They’re close, but not quite.

We hit the lowest point in early summer 2013. Then rates began to creep up slightly until they jumped at the end of the summer when Fed Chair Bernanke warned that the Fed might begin to taper their quantitative easing (pumping cash into the economy).

That day, we witnessed the largest single day rate increase we have ever seen – with rates jumping to 4.58%, the highest in two years. Although it was quite volatile, rates were still historically low compared to even a few years ago!

Janet Yellen nominated as new Fed chair

In September, after the Fed announced that they would, in fact, continue with quantitative easing, (NY Times: In Surprise, Fed Decides to Maintain Rate of Stimulus) rates began to decline again which is where we are now. We’re seeing lower rates compared to any other period of time except early this summer when they hit their lowest point.

On October 9, 2013, President Obama announced Janet Yellen as his nominee to replace Bernanke as the next Federal Reserve Chief. The general consensus is that this is good news for rates in the short term.

Based on her statements, Yellen will most likely continue the quantitative easing until the unemployment rate improves considerably. Of course, nothing is set in stone. Other economic indicators can throw all of this into flux. The markets are very unpredictable, especially with the current government shut-down and a looming debt ceiling crisis.

Considering a refi? Lock in Mortgage Rates now.

Currently we’re offering 30 year rates as low as 3.75% – with the low range between 3.75% and 4.25% depending on the loan program and qualifying factors.

Want to see at what rate you may qualify? Get a free instant rate quote: simply visit www.meridianhm.com/getrates. We’ve taken all the hassle from getting a quote – no waiting (and no pushy sales people) required!

What are Mortgage Rates Based On, and What is a Mortgage Backed Security?

What are Mortgage Rates Based On, and What is a Mortgage Backed Security?

Your neighbor just refinanced their home at 4.5% and your wife’s parents downsized to a condo and got a new home loan at 3.85% — and you’re wondering, how do lenders come up with these rates?

We get this question frequently, and it’s a good one.

First, it helps to understand that mortgage rates are not “one-size-fits-all.” Rates vary by program – such as FHA versus conventional – and they vary by each person’s personal credit and financial history. To learn more about how a lender determines your mortgage rate, read our article, “Why Can’t I Get the Best Mortgage Rate?” In it, our Finance Director Dave Rafter explains the ins and outs of rates and how they’re calculated.

Second, it pays to know that mortgage rates quoted by lenders and brokers are based on Mortgage Backed Securities (MBS) — also known as Mortgage Bonds. If “Mortgage Backed Securities” sounds familiar, it’s because yes, they played a starring role in the real estate bubble and subsequent crash.

But they’re not the bad guys.

How Mortgage Backed Securities work

Traditionally, when a bank loaned you money to buy a home, it kept this loan on its books – which tied up its capital for years. To free up capital – and put it back to work – banks bundle these loans and sell each “packet” as a single bond to investment banks. Investment banks then sell these bonds to investors like you on the stock market.

Up until recently, this process worked well, mainly because the bar was pretty high with regard to getting a mortgage: you needed a solid credit history, a high credit score, a down payment and oh yes, a job.

The underlying foundation of Mortgage Bonds – mortgages being paid month after month by people banks had carefully “vetted” – was considered relatively low-risk.

But then came sub-prime loans and no-doc loans and suddenly, people were being approved for loans without having been duly vetted by lenders. Hence, the crash – both of the real estate and financial markets – as people defaulted on their loans.

Mortgage rates are tied to Mortgage Bonds

Mortgage rates are based on the prices of Mortgage Bonds – and these prices fluctuate daily / hourly since they’re bought and sold on the stock market. Prices for Mortgage Bonds can be affected by the President of the U.S. calling for war or by a low jobs number or any other type of news that affects the financial markets.

You can follow the mortgage rate news at Mortgage News Daily.

One thing to note: Mortgage rates are NOT based on the price of the 10-year U.S. Treasury Note. While the 10-year Treasury Note sometimes trends in the same direction as Mortgage Bonds, it is not unusual to see them move in completely opposite directions. DO NOT work with a lender who has their eye on the wrong indicators.

If you have any questions about mortgage rates – or you’re in the market for a new home loan or refi – give us a call. We’re here to help you. Be sure to take a look at our Customer Reviews page to see how we’ve helped hundreds of other people like you.

How a Mortgage Becomes a Mortgage Bond

Although not as entertaining as Schoolhouse Rock’s “I’m Just a Bill,” this video does a great job of quickly explaining how a mortgage becomes a Mortgage Backed Security.

Maryland Refinance Rates- Lowest Mortgage Rates in Maryland

Maryland Refinance Rates – Lowest Mortgage Rates in Maryland

Maryland refinance rates have reached historic lows. The time to lower your rate, cash out, consolidate debt, or change your term has never been better. Even if you owe more than the value of your home you may be able to qualify for the lowest mortgage rates in Maryland.

Maryland Refinance Rates

The lowest mortgage rates in Maryland are available on government (VA, FHA, USDA) and Conventional loans (including HARP 2.0 refinance loans).

No Equity? No Problem.

With HARP 2.0, Maryland homeowners can now refinance with little or no equity. They may not even need an appraisal. And HARP Maryland refinance rates are just as low as today’s conventional Maryland refinance rates.

HARP 2.0 is a temporary program designed to help responsible homeowners who have been negatively affected by declining home values. Eligible homeowners can obtain the lowest mortgage rates in Maryland even if they are under water on their homes.

If you currently have an FHA mortgage you may be eligible for an FHA streamline refinance. Typically, these loans require no appraisal so home value is rarely a factor. Eligible homeowners can qualify for the same low Maryland refinance rates that are available on cash out FHA refinance loans.

Cash out/Debt Consolidation

With today’s low Maryland refinance rates there has never been a better time to consolidate your revolving debt into a new fixed rate home loan. Homeowners can combine their debt and save hundreds per month.

Homeowners can take out cash for home improvements, major expenses, and just about any other reason. Today’s lowest mortgage rates in Maryland make borrowing against your home more affordable than ever.

There are a variety of mortgage programs designed to help homeowners tap into their equity to pay off debt or to cash out. The lowest mortgage rates in Maryland are available on all of these programs.

Lower Rate/Change Term

Marylanders who have equity in their home and do not want to cash out can still lower their payments significantly with today’s Maryland refinance rates. Even if you have refinanced within the last few years you can still benefit from dramatically lower rates.

Also, there has never been a better time to change your term. The lowest mortgage rates in Maryland can dramatically enhance the benefits of term change. Homeowners can increase their term to lower payments, lower their term to pay off a mortgage quicker, or fix their term to get out of an adjustable rate mortgage (ARM).

Meridian Home Mortgage has access to the lowest mortgage rates in Maryland. As your broker, we act as your advocate. We do the rate shopping for you in order to secure the very best Maryland refinance rates.

We are proud of our Maryland roots. And we extend a warm welcome to our fellow Marylanders searching for the best Maryland refinance rates. Stop by to see us, call one of our Loan Officers, or apply now.

Why ARMs are Making a Comeback

Why ARMs are Making a Comeback

It wasn’t long ago that adjustable rate mortgages (ARMs) were broadly painted with the negative “sub-prime” brush. ARMs were abused during the most recent housing boom by both banks and borrowers. Since then, the nation has sobered up and borrowers and banks are acting more responsibly. Today, ARMs can still be viable alternatives to fixed rate loans. They are making a comeback because they make sense for borrowers with specific needs.

ARMS have variable interest rates that can periodically change. They typically have low starting rates which equate to low monthly payments. The low interest rates are fixed for a certain period of time before turning adjustable. The interest rate and payment can possibly increase numerous times after the fixed period.

ARMs used to be attractive options for savvy borrowers when mortgage interest rates were higher. They might have been inclined to take out an adjustable rate mortgage knowing that interest rates are likely to decrease. But, mortgage rates are not high now. So, why are borrowers still opting for ARMs?

Some take out ARMs knowing that they will only be in their home for a short period of time. They can have significantly lower payments during the fixed period and can hopefully sell their home before the interest rate begins adjusting.

Others who are buying a home or refinancing their existing mortgage opt for ARMs because they are confident that their income will increase with time and that they will be able to absorb higher payments in the future. Until then, they will have a lower payment that is more in line with their current income.

ARMS certainly fill a niche in the marketplace. While they are not for everyone, they can be smart tools for borrowers looking for short term benefits. It’s important to discuss all the pros and cons with a mortgage professional before making a decision.