Pages
Recent Posts
Blogroll
Low Interest Rates Are An Illusion
21/08/10
We hear about historically low interest rates on home loans practically every week. 30-year fixed loans are available with interest rates well below 5%, and they’re still going lower! 15 and 20-year loans offer even lower rates. At any other time, interest rates like these would have jump started the real estate market from a standstill to a frenzy in no time. But now very few people are taking advantage of these low home mortgage rates. Why is that?
The fact that so many homeowners are upside down on their mortgage is the root of the biggest problem. Property values have fallen significantly in the last few years. Many homeowners are finding that their homes are worth less now than when they bought them. Even many of those whose homes are now worth more than their original purchase price may still be under water if they refinanced their home and took cash out.
The maximum loan amount is typicallly a percentage of a home’s current value - current value being the key word. It’s not possible for people to pay off their old loan with proceeds from a new loan with a lower balance. Whether you want to sell your house and buy another, or just refinance the one you have, this is a deal breaker. So even if they are well qualified borrowers, unless they can come up with the cash for the shortfall, they’re stuck.
In this economy the unemployment rate is high, but as concerning is the length of time it has been so high. Many homeowners have been out of work for an extended period of time. There are also a lot of people who are working jobs that are far below their qualifications - and pay less - or working part time jobs. Somehow many of these people are making ends meet in spite of the challenges. They’ve cut back on spending, stay-at-home moms have gone back to work, and they’ve started their own businesses. Still, proving to a lender that they can make payments on the new proposed loan is difficult. And this in spite of the fact that they can show that they’ve been successfully making payments on their existing loan at a higher interest rate! Even for those who have sufficient income, changes in employment can make it difficult to qualify. Most lenders want to see two years of employment in the same field to consider a buyer stable. Borrowers who switched to a different field because they couldn’t find work in their chosen field, or borrowers who took a contract position won’t qualify until they have a two year history to show.
Lending standards have risen. The fact that lending practices were too lenient, causing the large number of defaults that we’ve seen is to blame. So banks have tightened up their requirements. Requirements for debt ratios and credit scores are much stricter than they were even years ago. The chances that a homeowner has a lot of cash in the bank and nearly perfect credit, after surviving employment problems, falling home values and other challenges, is slim.
First time buyers face all of these problems, except for being upside down on their mortgages. Unfortunately potential first time buyers with sufficient verifiable income, a hefty downpayment and great credit are in short supply. Many of those that can buy a home now are worried that home prices will decline further and/or that they’ll lose their jobs. Buying your first home is a scary experience. The current economic conditions don’t make it easy to take that risk.
So those tantalizing interest rates that we keep hearing about in the news remain just out of reach. Something that’s technically true, but simultaneously too good to be true.
If you are one of those in a position to buy a new home in California, this is the time to do it. Once the market turns around, interest rates will rise quickly. San Marcos new homes
No Comments »
No comments yet.
RSS feed for comments on this post. TrackBack URL