Mortgage Prospects in 2007

Posted by  on Apr 16, 2009
Mortgages in 2007 are very promising. First off are interest rates. Since 2004, the Federal Reserve Board ("the Fed") has raised the fed-funds rate (which influences mortgage rates) 17 times, upping it from 1% to 5.25%. It has recently been leaving it alone, but fears of inflation, as well as a housing market slowdown, have some people speculating that the Fed might soon cut the rate. Lower interest rates will likely spur more activity in the housing market.

Lower interest rates lead more people to buy homes, but it isn’t good news for everyone. For one thing, while lower rates mean more affordable mortgages, they can hurt savers. People with CDs and money market funds would like to make more than a few percentage points in interest at the bank.

The mortgage industry isn’t perfect. Many people have been signing up for especially risky mortgages, a trend that's probably not easing anytime soon. Certain home loans such as interest-only mortgages, "80-20" mortgages, and extra-long mortgages, such as 40-year ones can be risky endeavors. Interest-only mortgages offer low monthly payments, but you're paying off only the interest you owe in the first years, meaning you're building no equity for quite a while. With "80-20" mortgages, you get a main mortgage for 80% of your home's value, and a secondary loan (at a higher interest rate) to cover the remaining 20%. You essentially buy a home without a down payment.

Arrangements like these, along with people buying more home than they can really afford, have many homebuyers living on precarious ground. If they suffer a setback in their income level, they may not be able to meet their mortgage payments. This could lead them to lose their homes.

The vast majority of recent mortgages have been adjustable-rate ones, not fixed-rate ones. Adjustable rate mortgages can make sense for many people, especially those who plan to sell their home within a few years. But those who plan to stick around may end up facing steep interest rates in future years, resulting in ballooning mortgage payments.

Remember that this is the big-picture perspective. A potential home loan borrower is a small scale venture. Regardless of the loan terms, an intelligent borrower will save up a down payment for a home, if they’re looking for one. Be smart about mortgages, research your options carefully, and don't take on too much risk.

If share prices of homebuilders fall significantly, the lower prices might represent attractive buying opportunities. If you're focused on real-estate-related investments, then consider whether you expect companies such as home-improvement giants to suffer if the housing market stalls, or if you think they'll soldier on thanks to people remodeling homes instead of buying new ones.


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