Interest rates will continue to be volatile because we just don’t have answers about where this economy is headed. Just in the last month we’ve seen the rate on a 30-year mortgage rate go from 4 percent to 4.875 percent and that was after the Federal Reserve said they would buy $600 billion in Treasury securities with the stated goal of stabilizing rates!
Assuming that rates stay in some kind of moderate range –like between 4.25 percent and 5.25 percent– the affordability index will continue to be better than it has in decades. Compared with 30-year fixed rate loans that have jumped the most, Hybrid ARM loans like 5/1 and 7/1 ARMs are very attractively priced for borrowers for whom they are a suitable product, and that is more than who will consider them.
However, underwriting standards will continue to be tight. Lenders are paranoid about having to buy loans back and will be very picky about details, which will drive borrowers crazy. If you are considering a purchase, be bold and mighty forces will come to your aid. You have a great opportunity to buy houses at attractive levels.
It may still wise to take advantage of opportunities to refinance a potentially volatile ARM to a fixed rate loan. Some day, that ARM may be at 7 or 8 percent. Get it all approved and ready to go, then lock in on the rate dips.
The worry-factor will be the foreclosure issue. It is hard to rebuild a housing market when lenders have a large supply of homes overhanging the market. In spite of bad press and pressure from the government, lenders are doing a terrible job of handling this mess. It would be nice to see this change, but there are simply no signs of altered behavior.
There is talk about eliminating the tax deduction for mortgage interest. It may well happen, but when it does, it will not be an isolated change. It will be done as part of a more comprehensive overhaul of the tax code, so I wouldn’t let that deter you from buying a home.
So, what do you do with this information? Whether you’re thinking of buying or refinancing, be bold and initiate the process. Don’t wait. It will pay to be very opportunistic about choosing a good time to lock in, even