Mortgage Rate Today - Fixed Rate Mortgages - understanding The Cost
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Fixed rate mortgages advanced thirty or forty years ago, following the
depression. In the days of spiraling and then plummeting prices, both lenders
and borrowers became leary of loan products that could not be controlled in any
way. The mortgage lender wanted to be guaranteed that he would make a certain
amount of money on a mortgage, and a mortgage borrower wanted to know in advance
how much he would have to pay each month. It's hard to believe that the
interest only loan that has surfaced today was no ifs ands or buts a stock of the turn of
the century. Today, there is a mind boggling array of mortgage loans for the
borrower to take advantage of.
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The fixed rate mortgage became the standard type of mortgage after the
depression years, through the war years and all the way into the 1990's. It was
just about the only mortgage type that whatever knew; banks did not offer anything
else, and the communal did not ask for whatever else. Because this type of
mortgage served both the lender and the borrower so well in terms of reducing
risk of fluctuations, every person was happy.
A fixed rate mortgage would normally need a 20% down payment, and the bank
would extend a loan to finance the balance 80% of the value of a home. The rate
of interest on the loan was normally fixed for 20 or 30 years. Even if interest
rates went down, the banker knew he would get that rate on his loan, and even if
interest rates went up, the borrower knew he would only pay a unavoidable percentage
on his loan. However, interest rates did not fluctuate the way they do now, and
the values of homes did not change much either.
Then came the roaring 80's.
Interest rates sky-rocketed, and banks had to pay a lot more for their funds
than the 7-8% they were getting on home mortgages. They decided the only way to
counter this was to offer variable rate mortgages. If interest rates went up,
they could raise the rates on the mortgages. Homeowners came to accept this
solution, first of all because they normally had no choice, and secondly because
they figured the rates could come down as well as go up, so why did they want a
fixed rate mortgage if rates were low? And sure enough, rates did come down in
the late 1990's and early 2000.
Since that time, we have seen a proliferation of Arms (Adjustable Rate
Mortgages) and interest only loans. Interest only loans now inventory for 30% of
the mortgage market, up from 3% in 2001. There are so many new mortgage
products being introduced each day and it is no coincidence that these new
inventions have sprung up while real estate prices were sky rocketing and
interest rates are falling.
The fixed rate mortgage, which started the whole thing, is still around, still
financing the former types of home purchasers who still exist. Most
homeowners never pay off their mortgage. They either sell their home, or they
get new financing on it. But there are still the old fashioned few who purchase
their homes and take out a mortgage that they expect to keep paying off for
years to come. The former 20 year fixed rate mortgage suits them just fine.
A 30 year mortgage would be better, but there are very few lenders who would be
willing to lend for that long a term.
Even though there are pockets in the country where housing prices have gone up
astronomically, there are still some areas that have been relatively unaffected
by the real estate boom. Their housing prices have remained about the same as
they were in the 90's. Some population are still curious in a fixed rate
mortgage, even with the amenity of the flexibility that interest only
loans offer and the costs of adjustable rate mortgages. But the profile of the
homeowner who would be curious in a fixed rate mortgage is not the same as
the one who refinances constantly or sells his house and pays off his mortgage.
No, this homeowner bought his home 15 or 20 years ago and counted on living in
his home for the rest of his life as he got ready for retirement. Once they
reached retirement, the home would be paid and they would be regain in a place
to live. Refinancing or using home equity is of no interest to them. Slow but
steady is their philosophy; they paid their monthly mortgage at a fixed rate and
then they will own their home free and clear.
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