Let's all stop riding the roller coaster freak-out. As consumers and as a country, we all seem to be locked into a periodical cycle of anxiety over interest rates. Every quarter, we rush around like a flock of hens spooked by the shadow of a falcon. Will the prime rate go up? Will the prime rate go down? Inflamed by the commentary of financial prognosticators, the great prime-rate freak-out hits us every three months. You can set your calendar by it.
I say, relax. Check out the history of the prime rate for today’s lesson on why you shouldn’t believe the hype about the high cost of money. My advice is to get a grip and realize that we are all in a very good place right now if you want to get a mortgage or sell a home.
Let’s look at the how the prime rate affects the mortgage rate. Fluctuations in mortgage rates are directly tied with the fluctuations of other interest rates: The Prime Rate, Treasury Bill Rate, Treasury Notes, Treasury Bonds, Federal Funds Rate, Federal Discount Rate, Libor 6-month CD Rate, 11th District Cost of Funds, Fannie Mae-Backed Security Rates, Ginnie Mae-Backed Security Rates.
When Fed chairman Bernanke isn’t being undermined by the loose-cannon comments of former chairman Greenspan, he has been cautiously raising rates to deal with mild economic growth and mild inflation. “Mild” is the operative word here. It has all been mild, mellow, and moderate behavior since Bernanke took the chair in summer 2006.
The Federal Reserve is simply changing the discount rate (yesterday left unchanged at 5.25), which is the rate paid by a bank to borrow short-term funds from the Federal Reserve. The discount rate and the federal funds rate are the interest rates that mortgage rates are based on; the modulating economic cycles therefore influence financing a purchasing a home.
There is a glut of homes for sale out there, but that is mainly because owners have overpriced them, not because of foreclosure or high interest rates. History can hold our hand and calm our worry. The fact is, if we track the cost of money over the last six decades, the prime rate remains under the median.
As of June 29, 2007 the prime rate is 8.25, which is what it was exactly one year ago in 2006.
Pop open this window link below to see the history of the prime since 1947.
PRIME RATE HISTORY - 1947-PRESENT
The evidence shows our prime rate is still under the most frequent prime rate throughout history – 8.5. The median rate for the last 60 years has been 9.0--that’s our benchmark, that’s how we should measure ourselves. Don’t listen to the pundits, don’t listen to the clucking hens, don’t freak out every three months over whether the rate is going up or down.
Relax. And if you are waiting for rates to go down before you buy or sell property, don't. According to current pricing on futures contracts, heavy-hitter investors who trade in Fed Funds Futures proffer odds of just fifteen percent that the prime rate will be lower by the end of the year -- characterized as "very unlikely."
Bottom line: rates are historically low right now, and they are unlikely to go lower in the near future. The prime-rate freak-out hurts consumers, hurts the economy and hurts anyone who is looking to buy or sell a home. Avoiding it represents an opportunity for clear thought and wealth-building.
LENDING COME-ONS THAT ARE TOO GOOD TO BE TRUE
Predatory lending is back (did it ever go away?)
Recently, a client I’ve been working with on refinancing walked into my office with a mailer from a mortgage company. My client wanted me to beat the rate that the company was offering:
“Dear Borrower”
Regarding your existing home loan with us, we are currently offering an exclusive program to refinance your existing loan. Features of this program offer significant savings and can assist you in the changing mortgage market.
•NO Costs
•NO Points
•NO asset verification
•NO Application fee
•NO Credit repots
•NO No third party fees
•NO title, no escrow, or reporting fees
•ABSOLUTELY NO CLOSING COSTS.
“Smells as fishy as twelfth-century Denmark in August,” I said to my I-want-to-believe-in-a-free-lunch client.
“Well, this is from a good bank,” he said.
“Stay right there,” I said.
With my client still sitting in my office, I dialed and got an agent on speakerphone. I pretended I was the wife of my client and asked about the mailer rate. When I started asking what the bank’s YSP (Yield Spread Premium) was, and what his bank margin rate is, the agent started to back-peddle. He got awful mealy-mouthed awful quick.
The actual loan being offered to back up the mailer certainly was NOT a thirty year or even a fifteen-year mortgage. It was an ARM (Adjustable Rate Mortgage). Essentially, what the mailer offered was a disguised piece of lending, a wolf in sheep’s clothing.
It is now June 2007. The sub-prime crisis is supposed to be over, but still consumers receive these come-ons. People wind up in ridiculous loans for which they are overpaying on the back end. Lenders are supposed to be tightening up their practices. Ha!
Our federal and state agencies promote consumer education as the key to obtaining best rates on a home loan. That mailer should come with a consumer warning, but it doesn't. Here's one that I would append: "There's no such thing as a free lunch! No fees? No costs? Every single penny of those fees and those costs will be rolled up into your loan, so you'll be paying a high rate to finance them!"
Regrettably, the public – my client, for example – still wants to believe such too-good-to-be-true offers are the answer to refinancing.
ALSO: the buzz is out that fly-by-night mortgage companies continue to outsource their administrative jobs to India. Staffers say that If you call the internal help line for Human Resources, you’ll be talking (more like translating) with someone in India. And how would you feel if you did a refi and all your confidential customer information is on-line over there in Mumbai?
You will find that shady mortgage companies are constantly looking for new underwriters. Whenever you go to any job-searching engine, see their pleas for folks who will write bad paper. The sheep disguise can’t hide the big bad wolf’s fangs.
Recently, a client I’ve been working with on refinancing walked into my office with a mailer from a mortgage company. My client wanted me to beat the rate that the company was offering:
“Dear Borrower”
Regarding your existing home loan with us, we are currently offering an exclusive program to refinance your existing loan. Features of this program offer significant savings and can assist you in the changing mortgage market.
•NO Costs
•NO Points
•NO asset verification
•NO Application fee
•NO Credit repots
•NO No third party fees
•NO title, no escrow, or reporting fees
•ABSOLUTELY NO CLOSING COSTS.
“Smells as fishy as twelfth-century Denmark in August,” I said to my I-want-to-believe-in-a-free-lunch client.
“Well, this is from a good bank,” he said.
“Stay right there,” I said.
With my client still sitting in my office, I dialed and got an agent on speakerphone. I pretended I was the wife of my client and asked about the mailer rate. When I started asking what the bank’s YSP (Yield Spread Premium) was, and what his bank margin rate is, the agent started to back-peddle. He got awful mealy-mouthed awful quick.
The actual loan being offered to back up the mailer certainly was NOT a thirty year or even a fifteen-year mortgage. It was an ARM (Adjustable Rate Mortgage). Essentially, what the mailer offered was a disguised piece of lending, a wolf in sheep’s clothing.
It is now June 2007. The sub-prime crisis is supposed to be over, but still consumers receive these come-ons. People wind up in ridiculous loans for which they are overpaying on the back end. Lenders are supposed to be tightening up their practices. Ha!
Our federal and state agencies promote consumer education as the key to obtaining best rates on a home loan. That mailer should come with a consumer warning, but it doesn't. Here's one that I would append: "There's no such thing as a free lunch! No fees? No costs? Every single penny of those fees and those costs will be rolled up into your loan, so you'll be paying a high rate to finance them!"
Regrettably, the public – my client, for example – still wants to believe such too-good-to-be-true offers are the answer to refinancing.
ALSO: the buzz is out that fly-by-night mortgage companies continue to outsource their administrative jobs to India. Staffers say that If you call the internal help line for Human Resources, you’ll be talking (more like translating) with someone in India. And how would you feel if you did a refi and all your confidential customer information is on-line over there in Mumbai?
You will find that shady mortgage companies are constantly looking for new underwriters. Whenever you go to any job-searching engine, see their pleas for folks who will write bad paper. The sheep disguise can’t hide the big bad wolf’s fangs.
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