Posts Tagged ‘fixed rate loan’

The local and state governments will be gathering down for the budget session for the fiscal years 2008-09. But they are in a tizzy and huddling together over the newsbreak that foreclosures will soon seep into the smaller communities. This will worsen the situation with another 1.4 million houses being caught in the foreclosure net. Real estate prices are expected to fall further.

The worst affected are Florida and California – the two states that lapped in the luxury of escalating housing prices during the boom. The Associated Press reports that the Global Insight, an economic consulting firm, had compiled a study for the US Conference of Mayors that held a meeting in Detroit last week. The focus was on the foreclosure crisis and its related problems of crime and misery in the locality. The foreclosure net is spreading to include the general economy, according to some of the mayors. It is telling on the social fabric by breaking the backbone of society – the families.

Global Insight apprehends that property values will dip by $1.2 trillion in the coming year. California will account for half the figure. Here prices will go down by 16% whereas in the rest the drop will be by 7%.

The problem is from the drinking of a witch’s brew consisting of lending to high-risk borrowers in the sub-prime mortgage category. Now the poison is beginning to work and spreading like toxic fumes over all who made and took the drink and hapless bystanders also. With interests doubling, the borrowers just cannot manage. The inevitable result is foreclosure.

Politicians and lenders are in a scramble to help borrowers – in an attempt to save their own skins. ACORN – Association of Community Organizations for Reform Now is a consumer advocacy group operating across the county. It has recommended three suggestions to the mayors. Firstly to make the lenders agree to a 30 year fixed rate loan by modifying the existing loan so as to make the loan affordable to the borrowers. Secondly to finance counseling so that vulnerable families can be assisted and thirdly to call a moratorium on ongoing foreclosures.

Given the present scenario it is to everybody’s interest to halt the dreaded forward march of foreclosures. That includes the federal government, as overzealous lenders have been primarily responsible for this catastrophe. However the communities should be cautious about any tax-payer-subsidized plans.

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Home mortgage loans are the norm in the United States while going in for purchase of new homes. Apart from the loan amount, the interest rate and the period of repayment are the other two dominant factors in this process. Interest rates are of two types. One is the fixed interest rate and the other is the variable interest rate.

When a borrower opts for a fixed rate loan, he would be paying the same amount of interest for the entire period of repayment, irrespective of variations in interest rates in the market. Let us take a possible scenario. A homeowner has taken a home mortgage loan for $100,000 in January 2003 for a repayment period of 30 years. Prior to June 2004, the United States Federal Reserve had kept its overnight interest rates pegged at 1%. Hence, the borrower would have obtained the loan for an effective annualized interest rate of around 2% to 3%. After June 2004, the Fed had increased its overnight call rate 17 times consequently till June 2006. The overnight call rate of the Fed now stands at 5.25%. As such, the home mortgage loans granted at present carry an effective interest rate in the range of 5.8% to 6.5%. Under the circumstances, the said borrower is not at all affected by the rise in interest rates. Fixed rate loan has been the wiser decision.

Compared to a person who had taken a fixed rate loan, a borrower opting for a variable interest rate January 2003 would be forced to pay a much-higher-than-planned interest rate now. The monthly installment amounts would increase proportionately and the borrower might find it difficult to meet the higher installment amounts.

Economists forecast that the Fed is most likely to keep the interest rates unchanged at 5.25% for all of 2007 and most part of 2008, in the absence of any drastic upheavals in the financial markets or the economy. Some economists are of the view that the interest rates might be cut in the latter half of 2007. As such, it would be prudent for a borrower going in for a mortgage loan now to opt for variable interest rates, in the hope that the rates would become lesser over the next few years. A person with a fixed rate loan might find out over passage of time that the interest rate being paid on the loan is higher than the interest rates prevailing in the market at that time.

However, all this is based purely on speculation. There is no guarantee that the interest rates would go down or remain stable over the next several years. The interest rates might even be hiked further. It would be up to the individual borrower to ponder over possible future market scenarios, his probable income in the coming years, the appreciation or depreciation of the property value, and other such related factors, before arriving at a decision about opting for a fixed rate loan or a variable rate loan.

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