The Subprime Effects on Your Mortgage Loans
Posted by Frugal on August 3rd, 2007
As the credit risk increases at all spectrum, and more lenders going out of business, guess what? You and I will be paying much higher interest rates.
I just checked out the mortgage rates offered by the two cheapest mortgage sources that I relied on (only for quoting purpose):
Mtgcapital.com: 15 years fixed at 6.000%, 30 years fixed at 6.375%. Lender’s fee is $1250.
Absolute Mortgage: 15 years fixed at 6.125%, 30 years fixed at 6.375%. Lender’s fee is $399, and both are zero points.
The above rate is based on ^TNX or 10 year treasury at 4.77%, and ^TYX or 30 year treasury at 4.92%.
You won’t find out the effects of increased risk premium + decreased competitions if you don’t have a history. Fortunately, I had a previous post with the exact information that I need:
at Mortgage Capital.com:
1. 30 years fixed: 5.75% APR.
2. 15 years fixed: 5.5% APR.Both are zero points, $1250 lender’s fee.
at Absolute Mortgage:
1. 30 years fixed: 5.75% APR.
2. 15 years fixed: 5.5% APR.Both are 0.125 points, $399 lender’s fee (lower interest and/or lower fees). When you make a loan as big as 680K (exceeding conventional conforming loan of $417K already), the 0.125 point will cost you more fees compared to MtgCapital. Therefore, Absolute Mortgage should be cheaper in all cases.
The above rates are quoted when 10 year treasury yield was at 4.509% and 30 year treasury was at 4.65%
So let’s see how much more expensive you need to pay now. From mtgcapital.com, it appears that every 0.50 point will give you 1/8 lower in interest rate. I’m going to use that to adjust the interest rates wherever applicable. The 10 year treasury was 0.261% lower and 30 year treasury was 0.27% lower.
So at mtgcapital.com, the 15 years fixed is now (6.00% – 5.5% – 0.261%) = 0.239% more expensive. The 30 years fixed is now (6.375% – 5.75% – 0.27%) = 0.355% more expensive.
At absolute mortgage, the 15 years fixed is now (6.125% – 5.5% – 0.261% – 1/8% * 0.125/0.5) = 0.333% more expensive. The 30 years fixed is now (6.375% – 5.75% – 0.27% – 1/8% * 0.125/0.5) = 0.352% more expensive.
Conclusion: you and I will be paying about 0.25% to 0.35% more in interest rate for the same loan as before. On the 30 years, the risk premium is higher now also because there is a yield curve steepening effect. If Fed starts to cut interest rates, it may pin down the lower end of the curve, but the longer end (15 and 30 years fixed) may or may not come down in relative terms. Until the inflation appears subdued, the longer end will not come down as much.
Good luck to anyone who wants to get a loan, or refinance their ARM time bomb.
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August 3rd, 2007 at 8:40 am
Awesome deal ! Thanks for publishing frugal. I am still waiting for the housing prices to fall.
August 3rd, 2007 at 1:59 pm
Hi Frugal,
Thanks for your tip last time; it was your reference that helped me get a jumbo loan @ 5.875%. I went with Absolute Mortgage. It was only 3 mths or so ago that I asked you for your help.
The interest rates really have moved upwards so quickly. Thanks for you advices. I love your blog!
August 6th, 2007 at 1:22 am
Priya,
I expect the home prices to reach bottom NOT before mid-2010 or later.
Mike,
Did you get that for 30-year fixed? I guaranteed you that you probably won’t find a better deal than yours in the next 10 years, even after Helicopter Ben lower the interest rate back to 1%. The entire yield curve is going to steepen more.
August 6th, 2007 at 11:30 am
Frugal,
I took a JUMBO loan 5/1 ARM @ 5.875%. The plan was to drop the loan amount down to $400k after 5 years which is in the NON-jumbo category. This means I get slightly better rates(I’ll keep my fingers crossed) since in 5 years, my loan is already a NON-jumbo.
I noted your comment that rates will not look good in future… I’ll just have to wait it out and see.
August 9th, 2007 at 4:05 am
Frugal/all -
I’m making it public and standing my ground.
I remain confident that Rates WILL TREND UP in the near future, not down.
They (the FED) are waiting to do this at the right time.
Hint – Chinese currency
Charlie
August 9th, 2007 at 9:03 pm
I was a construction loan officer in ’94. Comparing rates then and now is night and day.
When you compare rates over the last 30 years, they’re still reasonable now.
http://mortgage-x.com/trends.htm
Of course, its all relevant, and that .125 is pretty important when it’s your money!
August 10th, 2007 at 1:01 am
ARM borrowers don’t realize that if rates go from 6% to 8%; that’s a 30% increase in rates and what they have to pay out.
Furthermore, the new homeowners/borrowers will not be able to pay 30% more on already inflated prices – prices will need to come down further.
Frugal – I really appreciate your website and what it teaches; there are only a few out there that is really educating us.
Charlie
September 19th, 2007 at 3:09 am
You guys heard Alan Greenspan on 60 minutes -
Same trend expectation – The FED will have to eventually raise interest rates.
Not immediate, but not more than 5yrs from now -
Otherwise, we will have some problems….
and he mentioned China being the catalyst of high Inflation in the US.
Now he’s starting to talk my language….