Finance Tips

Mortgage rates have a lot to do with how well the economy is performing. When mortgage rates go up, people can no longer afford to invest money in new properties. This, of course, brings a slow down to the building trade and it also means less money will be flowing through the economy.

On the other hand, when mortgage rates go down, more people are able to buy homes. The further down rates fall, the lower the income needed to buy homes. When homes are being bought, the building trade flourishes and this stimulates the economy in many ways.

Remember high interest rates?

It’s been 20 years since we’ve seen double-digit mortgage interest rates. Going back to the late ’70s and early ’80s, double-digit mortgage rates were the norm. It wasn’t until about 1985 after the Reagan administration had put an end to stagflation and the misery index that haunted the Carter years, that mortgage rates found buoyancy at around 7%.

Since that time, mortgage rates have fluctuated between 9% and about 5.5%. All in all, it has been a long stable interest rate environment that we have enjoyed over these past years.

Higher or lower?

Now, the question is where do interest rates go from here. By reading the charts, we will attempt to predict their future movement, just as if we were reading the commodities charts to get a handle on which way the price of soybeans were headed. Then, we’re going to make a prediction about another commodity that is sure to be shocking!

At this time, it is wise to make a disclaimer. First, no one can truly predict the future and second, any world event can change what the future looks like now in a heartbeat. Also, you can’t overlook the fact these unforeseen world events can happen out of the blue. With that behind us, let’s take a look at charts.

The past 18 years

Throughout the ’90s, interest rates on 30-year fixed mortgages ranged between 9% and 7%. At the time George W. Bush took office, the average 30-year mortgage rate was 8.75 %. From here, it eased downward steadily through the first George W. Bush term. It actually hit a low of 4.75% in late 2003. Here, interest rates ranged between 6.5% and about 5.5% for the next 3 years. This was an uncommonly stable interest rate environment and it was one of the reasons the housing market became red hot, and yes, overbought.

In 2006, the trend broke above 5.5% to about 6.5%, but rates never went any higher. Now, the interest rates are hovering around six percent and trending downward.

Reading the charts

The technical trader, that is, one who trades commodities by reading charts, would certainly believe interest rates, since they are heading downward, would have to once again test the low of 4.75%. It will be important to see if a double bottom is made at 4.75%. If this bottom is made, interest rates will go up.

Because of underlying fundamentals of the market, for instance the Fed trying to lower interest rates to stimulate the housing market, it seems much more likely interest rates will break through the 4.75% low once they arrive there. If they do, a new downward trend will be on the way. Just how much lower interest rates could get, is anybody’s guess. However, it certainly isn’t out of the question we could see 4% 30-year fixed mortgage rates sometime before this downward trend ends.

4%!

Historically speaking, 4% is a very low interest rate, but at this time it truly looks like we are much more apt to see 4% than a higher number, like 7%. So, for what it’s worth, this is my prediction. We will see the interest rate on a fixed 30-year mortgage somewhere down around 4% before an inflationary aspect of the economy takes over.

Where you think this inflationary aspect will come from? Well, here is another prediction and you may find it more astounding than the first one!

The impossible dream

It’s all over for the crude oil rally. Crude oil is overbought! There is no reason for crude oil to be trading above $100 a barrel. Like the tech stock boom of the ’90s and the housing market bubble of a couple years ago, it is a rally that cannot be sustained forever!

It’s anybody’s guess as to what the true market value of crude oil is right now. However, to think it is somewhere between $50 and $60 a barrel would be logical. However, when prices fall they tend to go through the true market value before they float back up to it.

If this crude oil market bubble burst follows the same modus operandi normal market bubble bursts follow, I can’t see why it is impossible to see $35 a barrel crude oil again; at least for a little while.

What would this mean for the price of gas? Maybe $1.49 a gallon? Well this may seem totally out of whack with what we’re hearing constantly coming from our news reports day and night, don’t think it can’t happen.

Back to reality

Certainly, there will be a time when $100 will not be too high a price for a barrel of crude oil. There will come a time when $3.50 is not too much for a gallon of gas. However, the charts are telling us that time is not here yet.

So, cheap gas, like the JFK, Ronald Reagan and George W. Bush tax cuts will stimulate the economy, and like the Bill Clinton Tariff agreements, it will make the cost of living lower which will make more goods affordable to the public. These things, though healthy for the economy, will bring on some inflation and this will break the interest rate downtrend.

I know these predictions seem pretty goofy and maybe they are! Still, my strategy is to believe they will happen and if they don’t, at least I’ll be happy believing them for now. Then again, if they do happen, we’ll all be happy!

Discount points are paid upfront to lower the mortgage. Borrowers often confuse between origination fee and discount points. Although the calculation of origination fee and discount points are the same, both are two different cost of borrowing. The origination fee is paid for the privilege of acquiring a mortgage. Ask your mortgage consultant if you need to pay origination fee too.

How to calculate discount points?

Discount points usually range from 1 to 3 points where each point equals one percent. For example, the borrower pays $1,500 upfront ((1% / 100) * $150,000) on a 1% discount points of $150,000 mortgage.

How much is the monthly mortgage payment with or without discount points?

On a $150,000 principal, 6.5% interest rate, 1 discount points, and 30 year mortgage, the monthly mortgage payment without discount points amounts to $948.10. Using 1 discount points, the borrower pays only $851.68 monthly mortgage payment which saves the borrower $96.42.

When you do get back the discount points?

Recoup time is how long to get all the money back with discount points upfront. The borrower gets $1,500 back in 16 months ($96.42 x 16). The borrower benefits from discount points if he does not leave and refinance before the recoup time on his home. Let’s say the borrower locks the mortgage on a five year mortgage term. The borrower pays $851.68 for five years which put $5,785.20 ([$948.10 x 60 months] – [$851.68 x 60 months]) back on his pocket.

General Rule

discount Points are options. It is up to the borrower to decide whether to buy discount points. With planning and shopping, the borrower indeed can save money. Not to mention, the IRS allows the discount points as a tax deductible.

For most people, one of their biggest dreams in life is to own a home. With so many mortgage options available, it can often be confusing figuring out what it means to acquire an affordable mortgage. There are a number of indicators that will tell you if a mortgage is affordable. Below is a list of indicators to help you determine if a mortgage is affordable.

1. Because of the current state of the housing market, lenders are now offering great deals on interest rates. Currently there are deals available where you can get a mortgage with an interest rate of around 5%. Many financial experts recommend acquiring a 15 to 30 year mortgage locked in at a low interest rate. The complete mortgage term could save a homeowner thousands of dollars. Locking the interest rate as a fixed-rate will normally have a term of 15 or 30 years. This will ensure your interest rates will not increase over the life of the mortgage. It is important to remember that the longer the mortgage term, the lower your interest rates. As well, the higher the mortgage that you obtain, the higher your monthly mortgage repayments will be. There are variable rates one can secure with their mortgage, but they fluctuate with the market. If the market is doing well, your interest rates will decrease, but if the economy starts to deteriorate your interest rates will increase.

2. Before applying for a mortgage, you first have to assess how much you can afford. You can determine how affordable your mortgage will be by using an online mortgage calculator. You will enter such information your income which will help determine how much you can actually afford to pay each month. Remember this is a base amount that does not include the cost associated with the purchase of the home. You will also have to put down a deposit. The higher the deposit, the lower your monthly payments will be.

3. Paying a monthly mortgage is not the only expense you have to consider. There will be other expenses such as utilities and home maintenance. It is also important to remember that you will have to consider additional expenses such as closing fees, title fees, attorney fees, taxes, registration fees, monthly homeowner insurance payments, etc.

A mortgage is probably the biggest financial commitment you will make in life. It is important to acquire an affordable mortgage to ensure that payments can be met even if your financial situation changes. Financing your mortgage is a serious life investment. The key to getting an affordable mortgage is to compare quotes from several different lenders to get a rate that is low and will not drastically increase if the market takes a down turn. As well, you should always read the fine print of the mortgage contract to avoid any future unexpected surprises that could affect your monthly payments. With the current incentives now being offered for mortgage seekers, this is a great time to find a great deal on a mortgage.