The highs and lows of parenting and real estate.

Wait, Now What's This About 4.5% Interest Rates?

One of the big stories in the financial news today (that didn’t involved the car companies asking for LOTS of money) was the one about 4.5% mortgage interest rates.

I heard talk of this from a couple of sources before I actually went out and found the articles to read for myself. Most of the talk was in the, “Check it out, soon you’ll be able to get a home loan for 4.5%!” and, “Hey, who cares what your interest rate will be on your new home will be when you buy it, just refi for 4.5% after you close!”

When I actually went and read the articles, it was apparent that there was a little more to all of this than, Woo!!! Awesomely low interest rates!

I also gave Matt, my mortgage guy a call to run through it all with him; which was quite an enlightening experience. I came away from all of this research with the sense that everyone has more questions than answers about this entire proposal.

To begin with, the entire idea that the government will ‘set’ mortgage interest rates at 4.5% is revolutionary and extremely complicated. Currently, the government does not set interest rate, the market does. Rates can be affected by things the government does (dropping the prime rate, for one), but individual lenders who actually loan the money are the ones who dictate what they will charge you to borrow the money.

So how can the government force lenders to set their rates at what they want? Will they offer bailout program money to the banks who participate? Will they further insure loans taken at this rate?

The other bit of info floating around has been the idea that this interest rate may not apply to refinances, because the intention is to stimulate home purchases to reduce the current national surplus of houses.

Right now lenders do not differentiate between home purchases and refinances when setting interest rates. So again, how will this work? Will everything change? And how long will it take to implement all of this?

And the biggest question of all: Will they actually pass this idea? And will it stimulate the housing market?

So… everyone needs to sit tight for a little while and see what’s actually going to happen before getting any hopes set on things like interest rates lower than they’ve been in 45 years. And that is what I’m going to do for now.

2 Responses to Wait, Now What's This About 4.5% Interest Rates?

  1. Wait — doesn’t the Federal Reserve set the national interest rate, which then directly influences mortgage rates? This is all so darn confusing.

  2. They set the prime rate, which does influnce interest rates, but often not immediately. In fact, often a cut in the prime rate will more quickly cause a jump up in mortgage interest rates. They have an effect on rates, but it’s not the direct relationship you might expect. The market ultimately sets interest rates. It’s all capitalism and competitivness (which is why the idea that the feds will ‘set’ the rates low is a little weird and disconcerting… at least to me).

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