Are mortgage interest rates expected to drop in about a year or so?

[Xavier434]

Title and Topic says it all.

I just read an article about whether or not now is a good time to buy. If you wish to read it you may find it here. In a nutshell, my position is looking good to buy sooner than later. However, the article mentions that one good reason to buy soon is to lock in a good interest rate now before they go up. Right now in my area, interest rates are averaging about 6%.

I was under the impression until now that interest rates have a good chance to go down once people start buying more. The reason why I believed that is because I thought the increased buying would create more competition between banks and other lenders. The response from these lenders would be to drop their interest rates in order to be competitive.

My question for you guys is whether or not that kind of response to the competition is true or false? If false, then I would like to know why and I would also like to know what lenders typically do in order to compete with each other. I am looking to buy a house in a little over a year so I would like to know what I should expect in the case where buying increases.

Also, I don't mind if you wish to offer your advice based on research instead of experience. However, I do request that you mention whether or not what you know is based strictly on research and hear say or if it is from raw experience with this subject.


Thanks everyone!

 

[MiniDoom]

Probably not much if any. Rates are at historical lows. I'd be more worried about home prices dropping, which depends on the area you live.

 

[Capt Caveman]

Rates are likely to go up and at best stay where they are now. Note, rates have gone up by as much as 1/2 point in the last couple of weeks.

 

[kranky]

Who knows where rates will go, but I am confident in saying it will have zero to do with how many people are buying homes.

 

[ponyo]

I would worry more about thing you can control like your credit and downpayment than trying to predict the interest rate.

 

[Xavier434]

Originally posted by: Naustica
I would worry more about thing you can control like your credit and downpayment than trying to predict the interest rate.

My credit is tip top. I don't have enough of the down payment yet though. That's just a matter of time. Part of the reason I am asking about this topic is to determine how much I need to dedicate myself to saving for the down payment quickly. If interest rates are not expected to drop due to competition then most likely I should hurry.

Also, I live in South Florida which means housing prices will probably drop more here than most places, but I don't know how much more. Odds are, it won't be enough to really make a substantial difference.

Keep the info coming guys. I am still very interested in hearing about what banks do to compete with each other as demand rises. If it's not interest rates then what is it? Can I expect more banks to offer 103% loans instead of the typical 95% for example? Are there other promotions that they use to convince people to borrow from them instead of the other guy?

 

[Linux23]

I'm also in the market, and have good (over 750 score) credit. I want to purchase in the next 3 months, but I don't know if 15K is enough of a down payment. Is that good enough for a first house or condo even?

I'm a first time buyer. Any tips appreciated.

Edit: I'm interested in buying a 2 or 3 family. I would never purchase a single family home until i'm married.

 

[bonkers325]

rates might be lowered once more, but the effective interest rates barely beat inflation as is. i wouldnt bet on them going lower than they already are (even if they do drop, expect only a 25 or 50 point cut)

 

[Capt Caveman]

Originally posted by: Xavier434

Originally posted by: Naustica
I would worry more about thing you can control like your credit and downpayment than trying to predict the interest rate.

My credit is tip top. I don't have enough of the down payment yet though. That's just a matter of time. Part of the reason I am asking about this topic is to determine how much I need to dedicate myself to saving for the down payment quickly. If interest rates are not expected to drop due to competition then most likely I should hurry.

Also, I live in South Florida which means housing prices will probably drop more here than most places, but I don't know how much more. Odds are, it won't be enough to really make a substantial difference.

Keep the info coming guys. I am still very interested in hearing about what banks do to compete with each other as demand rises. If it's not interest rates then what is it? Can I expect more banks to offer 103% loans instead of the typical 95% for example? Are there other promotions that they use to convince people to borrow from them instead of the other guy?

The days of 103% loans are over. Banks have tighten up their loan requirements substantially, unless you have tip top credit, you'll need a 20% down payment unless you get a loan thru the FHA or something.

Note, I just closed on a place last friday.

 

[ponyo]

Originally posted by: Xavier434

Originally posted by: Naustica
I would worry more about thing you can control like your credit and downpayment than trying to predict the interest rate.

My credit is tip top. I don't have enough of the down payment yet though. That's just a matter of time. Part of the reason I am asking about this topic is to determine how much I need to dedicate myself to saving for the down payment quickly. If interest rates are not expected to drop due to competition then most likely I should hurry.

Also, I live in South Florida which means housing prices will probably drop more here than most places, but I don't know how much more. Odds are, it won't be enough to really make a substantial difference.

Keep the info coming guys. I am still very interested in hearing about what banks do to compete with each other as demand rises. If it's not interest rates then what is it? Can I expect more banks to offer 103% loans instead of the typical 95% for example? Are there other promotions that they use to convince people to borrow from them instead of the other guy?

I suspect you're going to have to put minimum 20% down. If you've great credit, work hard to get your downpayment in order. I'm looking to buy investment beach condo in Florida and it would not surprise me if they ask me to put down greater than 35% at an awful rate. I'm saving my cash right now so I can avoid the awful interest rate.

 

[Xavier434]

Originally posted by: Naustica

Originally posted by: Xavier434

Originally posted by: Naustica
I would worry more about thing you can control like your credit and downpayment than trying to predict the interest rate.

My credit is tip top. I don't have enough of the down payment yet though. That's just a matter of time. Part of the reason I am asking about this topic is to determine how much I need to dedicate myself to saving for the down payment quickly. If interest rates are not expected to drop due to competition then most likely I should hurry.

Also, I live in South Florida which means housing prices will probably drop more here than most places, but I don't know how much more. Odds are, it won't be enough to really make a substantial difference.

Keep the info coming guys. I am still very interested in hearing about what banks do to compete with each other as demand rises. If it's not interest rates then what is it? Can I expect more banks to offer 103% loans instead of the typical 95% for example? Are there other promotions that they use to convince people to borrow from them instead of the other guy?

I suspect you're going to have to put minimum 20% down. If you've great credit, work hard to get your downpayment in order. I'm looking to buy investment beach condo in Florida and it would not surprise me if they ask me to put down greater than 35% at an awful rate. I'm saving my cash right now so I can avoid the awful interest rate.

Well, that part I know is inaccurate. I made several calls just yesterday asking what I would qualify for and how much I needed to put down. I am being told that I will need 5% down and I will get a 95% loan at a fixed rate of 6% for 30 years. I was also told that I would qualify for about 450k which is more than enough. I asked about 103% loans, but in those cases the down will be around 10% which is going to be tough for me considering housing costs here. They are at least offered though.

That's another thing. When it comes to banks tightening up, are they expected to lessen their grip when a lot more people start buying?

 

[kranky]

Originally posted by: Naustica I'm looking to buy investment beach condo in Florida and it would not surprise me if they ask me to put down greater than 35% at an awful rate. I'm saving my cash right now so I can avoid the awful interest rate.

Some FL condos might be worthless.

 

[Special K]

I believe mortgage interest rates are tied to the yield of the 30-year note. The only explanation for this I could find was because investors who purchase 30-year notes are also in the market for mortgage-backed securities, so the bank prices mortgages accordingly so they can be resold to investors as a competitive investment to the 30 year note.

Can anyone elaborate as to why investors who buy MBS also like 30 year notes?

 

[ponyo]

Originally posted by: kranky

Originally posted by: Naustica I'm looking to buy investment beach condo in Florida and it would not surprise me if they ask me to put down greater than 35% at an awful rate. I'm saving my cash right now so I can avoid the awful interest rate.

Some FL condos might be worthless.

I'm preparing to pay all cash for the right deal. That's why I'm saving like a madman right now and not having any fun.

 

[mshan]

Historically 30 year fixed mortgage rates have tended to run 1.5 - 1.75% above 10 year US Treasury Note rate.

However, during subprime credit crisis, that spread (risk premium) has increased.

If you've got very good credit, probably 20% down, and conservative overall debt to income ratios, and your desired house appraises correctly to loan amount, you could probably get a good mortgage rate.

20% down apparently is historically what has protected lenders from serious loss if you default on mortgage (house is collateral for loan). In declining market, they may require higher downpayment because value of collateral is anticipated to go down.




"I made several calls just yesterday asking what I would qualify for and how much I needed to put down. I am being told that I will need 5% down and I will get a 95% loan at a fixed rate of 6% for 30 years. I was also told that I would qualify for about 450k which is more than enough. I asked about 103% loans, but in those cases the down will be around 10% which is going to be tough for me considering housing costs here. They are at least offered though."

An honest lender needs like 17 pieces of information to provide you with an fair and accurate mortgage quote. You may be just getting "teaser rates" to lure you into the office. Get this book above before you do anything else:
http://www.amazon.com/Mortgage...&qid=1208959527&sr=8-1

 

[Xavier434]

Originally posted by: mshan
Historically 30 year fixed mortgage rates have tended to run 1.5 - 1.75% above 10 year US Treasury Note rate.

However, during subprime credit crisis, that spread (risk premium) has increased.

If you've got very good credit, probably 20% down, and conservative overall debt to income ratios, and your desired house appraises correctly to loan amount, you could probably get a good mortgage rate.

20% down apparently is historically what has protected lenders from serious loss if you default on mortgage (house is collateral for loan). In declining market, they may require higher downpayment because value of collateral is anticipated to go down.


http://www.amazon.com/Mortgage...&qid=1208959527&sr=8-1

I don't mind putting 20% down, but the problem is that by the time I save up that much I will probably be paying a lot more over the course of 30 years due to interest rates climbing. Not to mention that every month that goes by is a rent check that could be put towards a house payment and that bothers me a lot. I will have to ask what the difference will be in the deal I get between a 5% and 20% down payment though. Maybe it will be substantial enough to consider.




EDIT

Originally posted by: mshan

An honest lender needs like 17 pieces of information to provide you with an fair and accurate mortgage quote. You may be just getting "teaser rates" to lure you into the office. Get the book above before you do anything else.

I'm sure it's possible but this info came from both USAA and my old college's credit union. The credit union might steer me wrong (not sure), but I doubt USAA would.

 

[mshan]

Get the book I linked and start learning about educated and informed method of shopping for in the shark infested mortgage markets; that way you have decent chance of at least getting a rate and overall closing costs that is competitive with what you should qualify for (vs. paying much more because lender you chose realized you know nothing about shopping for a mortgage and can be ripped of badly and they know you may never even realize it; plus apparently people typically don't go back to same mortgage person for another mortgage, so if you realize it after you've signed papers, it probably doesn't make any difference to their business anyway)!

And like I said, you can't get anything representing more than a salespitch if you just call around and get quotes without about 17 pieces of financial information a reputable mortgage broker / lender / bank needs to what rate and closing costs they can honestly offer you, or if they are even willing to give you a loan.

I read realtor say that 0.5% reduction in mortgage rate is equivalent to 5% reduction is home purchase price in terms of carrying costs, so presumably you could view it the other way around also.

You could easily end up paying 0.5% - 1% more than you qualify for in mortgage rate just by shopping around ignorantly in even a regular mortgage market. And that says nothing about whether the house you buy is in market that still has signficant downside.

 

[LegendKiller]

Originally posted by: Special K
I believe mortgage interest rates are tied to the yield of the 30-year note. The only explanation for this I could find was because investors who purchase 30-year notes are also in the market for mortgage-backed securities, so the bank prices mortgages accordingly so they can be resold to investors as a competitive investment to the 30 year note.

Can anyone elaborate as to why investors who buy MBS also like 30 year notes?

The benchmark rates for mortgages aren't set off 30-year notes, it's tied to the 10-year notes. That's because, statistically, mortgage pools are 10-year assets.

 

[mshan]

Historical Affordability Data:
http://realestateconsulting.co...tter=Local/local200706 (June 2007 article)
http://realestateconsulting.co...tter=Local/local200803 (March 2008 article)

NY Times Rent vs. Buy Calculator:
http://www.nytimes.com/2007/04....html?_r=1&oref=slogin

Searching around a couple websites I think are fairly reputable about competitive mortgage rates, I think best case 30 year fixed rate for optimal buyer is around 5.75% with 1% origination fee and actual closing costs (no junk fees). So 6% your credit union quoted with 5% down (basically paying 0.25% premium for mortgage insurance) may be a best case scenario if you are an optimal buyer purchasing conservatively appraised property. You don't know what actual closing costs will be, if that rate includes discount points, and even whether, after they have all of your financial information, you would even be approved for any loan at any rate for particular property you are interested in.

I wouldn't rush to buy just because you are worried about rates going up. I think mortgage rates averaged around 6.75% just last summer. I would look at any buy now article on BankRate.com very cynically as their advertisers are often trying to sell you a mortgage!

 

[Xavier434]

Originally posted by: mshan
Get the book I linked and start learning about educated and informed method of shopping for in the shark infested mortgage markets; that way you have decent chance of at least getting a rate and overall closing costs that is competitive with what you should qualify for (vs. paying much more because lender you chose realized you know nothing about shopping for a mortgage and can be ripped of badly and they know you may never even realize it; plus apparently people typically don't go back to same mortgage person for another mortgage, so if you realize it after you've signed papers, it probably doesn't make any difference to their business anyway)!

And like I said, you can't get anything representing more than a salespitch if you just call around and get quotes without about 17 pieces of financial information a reputable mortgage broker / lender / bank needs to what rate and closing costs they can honestly offer you, or if they are even willing to give you a loan.

I read realtor say that 0.5% reduction in mortgage rate is equivalent to 5% reduction is home purchase price in terms of carrying costs, so presumably you could view it the other way around also.

You could easily end up paying 0.5% - 1% more than you qualify for in mortgage rate just by shopping around ignorantly in even a regular mortgage market. And that says nothing about whether the house you buy is in market that still has signficant downside.

Wouldn't it be easier just to go through the process of getting pre-approved by many lenders and start comparing? I was under the impression that process involves taking into consideration all of the financial information that is normally considered and the pre-approval means you get what you see on the papers should you choose to do so.

Is that not true? My plan to try and estimate where I currently stand heavily relied on that process. Keep in mind that I realize I may want to get reevaluated when the time comes since the market will change. That plus I do not know how long the pre-approval is good for so I may have no choice to get reevaluated.

 

[mshan]

Calling around randomly and asking for "best rate" will just get you teaser rates designed to get you in the door. If you shop this way, you are asking for a very unpleasant surprise when you get to closing (rate and / or closing costs much higher than what you were told on supposed "Good Faith Estimate").

There are probably lots of how much mortgage you can afford calculators on the web that can get you same basic info as a pre-qualificatiion letter.

The way you're proposing to shop for a mortgage, you are asking to get ripped off big time (rate on your pre-approval letter may not reflect anything near what you actually get on closing documents, and at that point, you may have unwittingly committed to non-refundable fees / rate lock fee / or non-refundable earnest money downpayment on house). Unethical lenders know that if they get you to the closing table, you may not notice carefully what you're signing, or that at this point you're basically stuck closing even if rate and closing costs have skyrocketed from what you were told on phone when you called in originally.

And they know that most people never use same mortage broker / lender / bank again, so it's not like they are losing future business by screwing you.
http://www.amazon.com/Mortgage.../ref=pd_ecc_rvi_cart_1

 

[Xavier434]

Originally posted by: mshan
(rate on your pre-approval letter may not reflect anything near what you actually get on closing documents, and at that point, you may have unwittingly committed to non-refundable fees / rate lock fee / or non-refundable earnest money downpayment on house).

This is the only part I was unaware of. I was under the impression that nothing in a pre-approval letter is subject to change as long as you close within a certain window of time after the pre-approval occurs. What is it that honest lenders look at that can cause changes to what is stated in the pre-approval letter? Also, keep in mind that I have never stated in this thread how I am proposing that I will shop for a mortgage. I have only stated what I have done thus far which I realize is minimal aside form individual research and some phone calls.

 

[mshan]

Well, the wholesale cost of the money for your loan will fluctuate from day to day, and even intra-day.

And probably risk stratification using more detailed financial info that wasn't provided at time of computer generated pre-approval letter.

Plus, they need to know what the collateral (house) for the loan is really worth, whether it will depreciate in value over their antipated life of your loan.

They have their cost for your loan money, how much of a risk premium you and your property represent, and how much profit they want to make on rate and closing costs.

Pre-qualification / pre-approval letter is probably nothing more than sales pitch. Even if they blatently lie to you on Good Faith Estimate, I don't believe there are legal penalties to them for doing so (it is an "estimate", so to speak).

Honestly, get the book above, it's easy to read. And when you do going shopping for a mortgage, make sure you're comfortable that the people you're dealing with seem honest and ethical and what they promise doesn't sound to be too good to be true.

Good Luck!

 

[Xavier434]

It sounds like the biggest hoop to jump through is finding an honest lender. For this reason, I will most likely be going with USAA since they are exclusive for those in the military, government, and dependents. If not then I will probably rely on personal recommendation only from those who I trust.

 

[alkemyst]

I work in the industry and I really doubt one will see rates going much lower than now.

However; the big mystery is the foreclosure market. This market works against both resellers and builders.

Noone knows how big this is going to be yet and could cause a temporary decrease in value of other properties.

I bought a home late last year. In my area my neighborhood has pretty much adjusted down close to realistic prices. In reality if I sold today, I'd be out a few thousand possibly, but nothing terrible.

It really depends what you are buying and where.