Will 4.5% mortgage rates jumpstart the housing market?

By Xin Lu on 4 December 2008 (Updated 22 February 2010) 13 comments

It seems like everyday the folks in Washington are rolling out a new plan to fix our economy.  The Federal Reserve is running out of room to cut their federal funds rate, so now the news reports that the Treasury is planning to forcibly cut mortgage interest rates to 4.5% on new mortgages.  The details about the plan still remains unclear, but  will this boost the sagging housing market?  Also, how could this help you as a consumer?

First, it is unclear if the 4.5% interest rate can be applied to refinancing a mortgage.  From the sound of the CNN article the 4.5% rate would be available to those who try to refinance, but a new article in the Washington Post states that the dirt cheap mortgage rate would only be available for new loans on home purchases.  If this is only available for new home purchases then it would not help anyone with unaffordable mortgage payments.

I think this artificially depressed mortgage rate could help people that have capital to buy a home, but it could also artificially prop prices up so that the benefit a potential homebuyer could receive gets cancelled out by the inflated price. The big winners would potentially be investors in real estate that could rent out their homes for returns more than the interest rate they pay, but once again, these are people who already have money and do not need any help. 

According to the Census Bureau, the homeownership rate in America is 67.9%, and that means most people are not exactly jumping to buy a place to live in because they already have a mortgage or two.  So if these low rates are not made available to the majority of existing homeowners, then there may be more seething anger in the future.  Even if the lower rate were offered to everyone, as the CNN article pointed out, many who do not have enough equity in their homes may not qualify for a refinance.

The CNN article seems to indicate that this move is being driven by lobbyists from the home building industry.  There is also another more drastic program called "Fix Housing First" that is being pushed by builders that proposes subsidized loan rates of 2.99% on new home purchases made next year.   I do not know about you, but this seems like an attempt by builders to prop up the prices of their unfinished units.

In light of this, I guess my only advice to those of you that have not bought a home yet is to keep as much cash as you can because prices are still falling in most of the country and having a significant downpayment and a good credit history is key to qualifying for a mortgage.  For those of you that already have a home with an interest rate higher than 4.5%, perhaps all you can do is complain to your representatives later.  If it turns out that you could refinance to more than 1% below your current rate, then you could save quite a bundle over the term of your loan.

Some people will definitely profit from all of this price fixing, but odds are these people are not everyday folks who just want a home of their own to live in.

 

 

 

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Guest's picture
Ceres

I disagree that lowering the mortgage rate will artificially prop up housing prices as long as the stringent lending guidelines are followed - that means the borrowers must have at least 10% down (or even more depending on location), a good credit score, and the income stream to qualify for the loan. While it may be true that it will help those with money more than those without, but truth is, those without money should not be buying houses in the first place.

As for the super-rich who will reap the most reward from this per your last paragraph, they probably won't be the majority of those who are helped. Instead, the lower mortgage rate will benefit many who have sat out the bubble because they make their purchase decisions on the value of what they are buying!

Remember, it's not the mortgage rate that got us into the mess we are in now -- it's the careless lending practice of giving loans to those who obviously cannot afford the payment!

Guest's picture
Jerry

I too feel that the these programs and money needs to be spent in ways that will help those that need and deserve the help. Not necessarily the people that bought beyond their needs but the average home buyer that may be struggling with the falling economy. I think home prices do need to come down to an affordable level for the average income household. Lower rates is not necessarily the answer.

Andrea Karim's picture

I've found that more stringent rules regarding new mortgages are the rule these days. My coworker owns a condo and she and her husband were looking to purchase a home. They had enough for 15% down, and could only qualify for a very high interest 30-year mortgage. They opted to wait it out in their 450 sq ft condo.

Guest's picture

While I agree that this measure could potentially prolong the financial crisis by propping up prices, I also think this can cushion the bottom if/when we reach it.

I think Bernanke's primary objective is to provide enough stimulus for reserve capital to come in, and buy up the excess inventory still remaining on the market. Once this goes away, the bottom shouldn't be far behind.

Guest's picture

it may not kick start the economy. i was already gonna buy a house, but saving 50 bucks a month would be AWESOME!!!!

Guest's picture
Edie

If this 4.5% rate happens for a 30 year, I wonder what a 15 year rate would look like? Perhaps between 3.5% and 4%?

If the law doesn't allow a re-fi for existing homeowners who qualify, I think there will be a terrible backlash.

Guest's picture
Kelja

Whatever happened to letting people succeed or fail on their own? When did self-reliance become 'Un-American'? Everything the government is doing is distorting the marketplace and will cause the problem to get worse - not better.

Obama will become the new FDR and throw billions - excuuuuuse me, Trillions - into the problem. Read your history - FDR's misguided lurch to socialism greatly extended the length of the Great Depression. Unemployment was about the same in 1941 as it was in the early '30's. World War II finally ignited the economy.

How come so many have so much faith in those who run the grossly bloated government. Don't you realize the same people who caused the problem are the ones who are expected to solve the problem?

In any event, it's too late.

Guest's picture
Lindsey

The big winners would potentially be investors in real estate that could rent out their homes for returns more than the interest rate they pay, but once again, these are people who already have money and do not need any help.

I disagree with this statement. Many people looking to buy investment property to rent out aren't rich. Instead, they own one or two 1-4 unit properties that make up a portion or all of their income. In my state (Louisiana), small-scale landlords make up at least 1/3 of the rental properties available. A 4.5% interest rate could help someone buy a property to supplement their income, for instance, a single mom who might be able to buy a condo to rent out so that she doesn't have to take a second job to support her family.

Personally, I'll be looking to buy a house (to live in) in the next year or so. This is a big incentive for me.

Guest's picture
Wilson

"Personally, I'll be looking to buy a house (to live in) in the next year or so. This is a big incentive for me."

Your probably trying to sell a house. Or you work for a bank.

Guest's picture
Kate

If they open this up to refinancing I think it could be a huge change to the economy. For example - I have a 30 year, fixed rate mortgage at 6.125% with a balance of $150,000. At 6.125 percent the payment is $911 (of course not including taxes, etc). If refinanced at the 4.5 percent rate the payment drops to $760. A savings of $150. The savings would be larger depending on the size of the mortgage.

Of course I would hope that people would do a straight re-fi and not a cash out but who knows. An increase of $150 per month in people's pockets could be the psychological boost the economy could use.

Me? I'd do the re-fi and use the extra cash to pay off the car, etc. No plasma TV anytime soon for our family.

Guest's picture
Guest

These new rates are for both purchase and refinance.

However to get those rates your fico needs to be at 740+

Every 20 point decline on your fico means an increase in rate.

Example: 740 fico today = 4.625% with 0 discount points.
640 fico today = 6.00% with 0 discount points.

With the majority of borrowers having scores in the 600s, the benefits will be available to fewer people.

These are facts, not opinions.

Guest's picture
Guest

Please cite your source for the FICO sliding scale for interest rates.

Julie Rains's picture

Here is a source from Fair Isaac: http://www.myfico.com/myfico/creditcentral/LoanRates.asp; it shows how in general FICO scores impact interest rates.