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September 8, 2008
Interest Rates Are Awesome
Not sure if anyone is currently in contract or looking to refinance but interest rates are amazing today. They will probably go back up a little in the next few days as this may be a knee jerk reaction to Fannie and Freddie getting bailed out by the gov.
If you are paying 1pt you are at 5.625% on a 30yr fixed.
No points you are under 6% at 5.875% today on the 30yr fixed.
Call you broker or banker if you are currently floating to lock in.
Comments
Adam, perhaps you can answer a question that has been nagging me for a while. As you probably know, it is possible to look up mortgage documents (at least for condos; not so for coops) using the City's ACRIS system online. I am a nosy person, so I have looked up mortgage documents for various people I know (as well as celebrities etc., again just to be nosy). For mortgages with a floating rate period, there is typically a "floating rate rider" that shows the base rate and the spread during the floating period. It seems that everyone who has a floating rate has a base rate of one-year treasuries and a spread of 2.75%. Is this some sort of standardized documentation that gets filed with the City while the real rate is reflected somewhere else? I just can't imagine that everyone I know (and some I don't) all just happen to have the exact same floating rate.
Also, everyone seems to almost uniformly have an initial rate in the low sixes (all rounded to an eighth of course), regardless of size of the loan, LTV, or when the loan was made. What gives? Have I just happened to see a strangely uniform bunch of documents or do the docs on ACRIS not reflect actual borrowing terms?
Posted by: lechacal at September 8, 2008 1:14 PM
To be quite honest I havent checked Acris in ages. When I was a closer (years ago) I used it quite a bit when I was handling those parts of the transactions. My attorney usually handles all the odds in ends with recording docs with the city these days. I would have to speak with him to see what his opinion is.
When you have an ARM your rate is calculated by adding the index plus the margin. The margin is usually fixed and the indexz adjusts according to market. A lot of conforming ARMS tend to have a 2.25% margin so I'm not sure as to the 2.75% margin.
Posted by: Adam Dahill at September 8, 2008 1:34 PM
Lechacal--remind me not to give you any personal info. Haha!
Posted by: wasder at September 8, 2008 1:36 PM
What's the rate on a 10/ARM I/A?
We locked in a month ago at 6.25%. Can I re-nogotiage with the bank or am i trully "locked in".
Thanks
Posted by: kdabrowski at September 8, 2008 1:42 PM
Although lechacal peruses ACRIS just to be nosy, I wonder how safe it is to have so much information, so easily accessible. ACRIS has posted actual copies of the original deeds complete with signatures. This opens every homeowner in the city to fraud.
I know that this is public information, as it should be, but before the advent computer-based searches, you had to actually go to Borough Hall and pull the microfiche in order to view an actual deed. You also had to show identification before being given the microfiche which was recorded in a log. At least that way there was some sort of a record as to who viewed the microfiche, if there were later a need to investigate a criminal act.
Posted by: Just Wondering at September 8, 2008 1:42 PM
kdabrowski- Some banks will allow you to "float down" to current market rates but they will either pad it with a pricing adjustment or charge you to lower the rate. You can try playing hard ball and tell them that you are going elsewhere but if they are giving you good service and willing to negotiate I wouldn't hold them over the coals for an .125%
That said I am actually pricing the 30yr fixed better than the 10yr ARMS today. I'm doing 6% for a 30yr with the 1st 10yrs Interest Only.
Posted by: Adam Dahill at September 8, 2008 1:55 PM
I totally agree with Just Wondering. I literally just discovered ACRIS a couple of weeks ago and of course had to look up a few people just out of curiosity. I was astonished at what I was able to find and how easily and quickly I could find it.
One of my personal favorites is a power of attorney signed (and you can see the signature online) by Mr. Gordon Sumner to his lawyer. Mr. Sumner just bought a pretty sweet apartment at 15 Central Park West. I bet it's pretty damn difficult to find something that is actually signed in that name. I also found some sort of transfer between Ethan Hawke and Uma Thurman.
Posted by: lechacal at September 8, 2008 1:55 PM
"That said I am actually pricing the 30yr fixed better than the 10yr ARMS today. I'm doing 6% for a 30yr with the 1st 10yrs Interest Only."
10 years interest only. You'd think people would have learned by now, or at least the banks would have. Must be more money floating around than people are letting on.
Posted by: denton at September 8, 2008 3:00 PM
The rate is fixed for 30yrs and it they allow you pay the IO for the first 10yr and then it converts to a 20yr fixed rate. I think it's a fantastic product. What's there to learn? You barely pay any pricipal the first years of the mortgage as it is. I personally have a 30yr IO and I make pricipal payments every year with my tax refund and then my monthly payment goes down as the loan re-amortizes.
10 years is a long time when the average mortgage has a life span of 5-6 years.
Posted by: Adam Dahill at September 8, 2008 3:31 PM
These are toxic mortgage products. This is exactly the sort of thing that got people completely over their heads in other markets and caused them to lose their homes.
Posted by: lechacal at September 8, 2008 4:28 PM
How is a 10yr IO toxic? That means if you bought a property in 1998 you would be upsidedown today? Are you crazy? Think before you type.
Even today banks like Astoria Federal Savings do not even offer a 30yr fixed. They don't have it. Give them a call. They prvide Arms, a 10 and 15yr fixed but no 30yr. A 10yr Arm or a 30yr IO are perfectly safe products.
Posted by: Adam Dahill at September 9, 2008 9:30 AM
Toxic mortgage products sound like great ideas in bull markets and end up being terrible ideas in a downturn. They decrease monthly payments in the short-term, which in the long-term pushes people into prices they can't really afford. New York real estate is in the early stages of a downturn. At least you aren't pushing interest option products, which are the most toxic.
A 10-year interest-only mortgage becomes toxic at year 10 *unless* it can be refinanced. Many will not.
Many, many, many buyers in other markets have learned the hard way that they shouldn't have taken out an IO mortgage (either because it would have kept them out of trouble to stick with a fully amortizing mortgage they can actually afford or because they got kicked in the teeth when the mortgage started to fully amortize and they couldn't refi). Many, many buyers in NYC (where these products are particularly popular because of affordability issues) will learn some pretty hard lessons in the next 10 years.
IO products are actually appropriate for a very small number of financially sophisticated buyers. In my experience, the great majority of people who consider themselves financially sophisticated are not, and should stay far away from these products.
1998-2008 performance is a completely irrelevant red herring.
Posted by: lechacal at September 9, 2008 9:59 AM
Those are indeed great rates, short-term and historically. It may convince some buyers on the sidelines to jump in now. I know similar rates in 2003 got us to buy. We just couldn't see rates going much lower than 6% for a 30-year fixed on a co-op, which is what we got with buying a point.
As for the various "products," I don't consider myself financially sophisticated, but in hindsight, we'd have been much better off with a 5-year ARM, considering that we sold that apt. at the height of the boom. And I can see the point of a 10-year I/O, but I'm too conservative to assume that either I'll sell before the piper must be paid, I'll have the discipline to pay down the principal, or that I'll see a significant rise in income to handle a 20-year fixed.
I have no problems with mortgage gimmicks per se, but I also know enough to know what I don't know, if that makes any sense. A lot of folks don't.
Posted by: Bolder at September 9, 2008 11:04 AM
I actually think the pay option arm products are all but done with. Those were dangerous because they allowed you to differ your interest payments causing your principal to increase as opposed to decreasing or staying put ala IO. Wachovia was one of the last banks offering the payment option loans and they went the way of the Dodo. I actually never orginitated a single payment option loan, I always found it risky and a vast majority of my borrowers didn't fully understand the caveats that came along with it. I picked up numerous clients by shooting holes in this product by explaining all the things that could go wrong with it.
Posted by: Adam Dahill at September 9, 2008 11:45 AM
1998-2008 information a red herring? WTF does that mean. Please provide reasoning. Are you saying that you shouldn't factor past performance of Ny RE when deciding whether to invest in Ny Re? Ridiculous. Look it's simple. With I/0 products you pay less and get more of a tax benefit than you would on a principal and interest product. With io You are supposed to be disciplined and pay down your principal with your tax bennys. In addition you have your 10% to 20% equty in the RE and in Ny over a ten year period, like FROM 1998 TO 2008, you will receive passive market appreciation. Sure not every year and you may even lose some some years but over the course of ten years, depending on your market, you BET YOUR ASS you will see passive appreciation over ten year period. Consider even a 2% ten year average and you will definitely be able to refi.
So for example you take a 500000 loan amount that stays stagnant over course of ten years because you are io. Now take your 2% year over year, very conservative BTW even in downturn like early nineties that lasted only four years top to bottom to flat for two TOPS, and you will be more than RIGHT SIDE UP so that bank will finance a refi no PROB.
The real if is what will rates be like in tenyears. But even that can be speculated with more certainty than in the past. Will the volker years come back? Could we see ten plus gain? I don't think so. If anything the lendig rates over the years have become a lot less volatile due to better monetary policy.
But let's be honest even dr the naysayers out there. In the right market, manhattan virtually anywhere, BrooklynQueens near the water, jersey near the water as well, what's your first inclination? Remember these markets are in the beginning of a turn for a year plus now. The rest of the country is near it's bottom. Both will probably flat for awhile. BUT ten years from now?? That's an awfully long time away. My bet is on these markets.
Posted by: k91 at September 9, 2008 2:41 PM
K91, thank you for the all caps contribution to the discussion.
There have been a great many financial bubbles in history, and they tend to follow a pretty predictable pattern. Yet somehow humans still fail to understand that price trends in the years leading up to a bubble are actually a counter-indicator for the future. Make decisions based on 1998-2008 prices at your own peril. They aren't just a red herring -- they are a mirror image (albeit an exaggerated one) of what is going to happen in the coming years.
Don't forget the lost decade in New York real estate starting in the late 1980s. There are lots of people who sold 10 years after they bought at break-even. And those were the ones who were able to wait 10 years before selling. Your post repeats what a great many New Yorkers said in 1988. I have an opportunity to not repeat their mistakes, so I won't.
Somehow, in every bubble, people just forget what has happened in every previous bubble. Lots of ink has been spilled about how this sort of collective amnesia is actually good for us (on the whole of course; as an individual, you always want to be the first to recognize others' bad decisions).
Anyways, it's fine that your bet is with these markets. Bet away. My bet is against them. For many reasons, I think people who buy at current asking prices will be lucky to sell at the same price in 10 years, and I feel quite confident that I should wait a couple of years before buying. Only time will tell which of us is right. In the meantime, feel free to reserve your use of all caps for your next online debate with a teenager.
Posted by: lechacal at September 9, 2008 3:07 PM
Lechacal: As much as I hope you are wrong, I respect the way you express your opinions and you certainly seem to have a basis in factual information for your posts. It would certainly be a fairly major downturn economically for housing prices to be the same in ten years. Not saying it won't happen but its a pretty radical opinion as far as I can tell. Still, I wouldn't totally bet against you either.
Posted by: wasder at September 9, 2008 3:33 PM
If those that are in contract arent locking in rates today then theyre making a big mistake. 30 years fixed rates at 5.75%. Rates are going to be volatile and timing is key. With rates this low there is only one way for it to go. And in a worst case scenario you can "float down" if rates drop. sunny_hong@countrywide.com
Posted by: shong1 at September 10, 2008 12:36 AM
Interest only options arent bad at all. Its actually a great product for some. I closed for a resident doctor. In 2 years his pay will triple and in the meantime he needs his payments low. And you can always make extra payments to your principal.
Posted by: shong1 at September 10, 2008 12:40 AM
Posted by: lechacal at September 9, 2008 9:59 AM - "A 10-year interest-only mortgage becomes toxic at year 10 *unless* it can be refinanced. Many will not."
Toxic?! I think you misunderstand what a 30-year FIXED 10-year I/O option loan is.
Even if the borrower makes no principal payments in the first decade (most do), the loan simply becomes a 20-year FIXED mortgage at the SAME original interest rate.
The difference between a 30-year amortization schedule and a 20-year amortization schedule is not that great, especially taking into account 10-years of inflation.
ARMs and the like could be described as "toxic" but this type of loan? You are misinformed.
Posted by: Mr Joist at September 10, 2008 11:35 AM
I am not mistaken about how this product works. At year 10, you go from:
- paying only interest and zero principal; to
- paying interest plus principal on a 20-year amortization schedule.
The resulting increase in monthly payments can be a kick in the teeth.
The difference between principal payments on a 30-year and 20-year amortization schedule is completely irrelevant. What matters is the difference between zero principal payment and the payment on a 20-year schedule.
In my view ARMs are less toxic than IO products, unless of course they come with an initial teaser rate. IO products allow people to buy more real estate than they can actually afford. They find this out when the IO period expires. At that point their mortgage becomes toxic.
Posted by: lechacal at September 10, 2008 2:01 PM
Some people like Vanilla and others like the Rocky Road.
All that I can say is that if you income hasn't increased in 10 years you are in the wrong profession. They should at least increase a measily 3% to adjust for inflation.
If rates are in the 10's or higher salaries should also be much higher. We will have much bigger problems if salaries stay flat and interest rates go over 10.
Rates were great this morning and they are now higher. Very Volatile Market.
Posted by: Adam Dahill at September 10, 2008 4:15 PM
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