The Downside of a Four Percent Mortgage Now

March 16, 2009 No Comments »

four leaf clover

In recent weeks, so-called “money gurus” like Jim Cramer and Suze Orman have called for four percent rates on all new mortgages to solve the ongoing housing crisis.

The pair has proposed separately that both new and existing mortgages be offered or refinanced at four percent to protect at-risk borrowers and promote homeownership.

And while the government has since stepped in with a different plan, its “Making Home Affordable” program aimed at incentivizing low-rate refinances and loan modifications, the approach carries similar pitfalls.

Tinkering with mortgage rates so borrowers can obtain more affordable mortgages carries with it serious dangers, as does lending to new borrowers at these below-market rates.

If anything, it’s setting us all up for a huge repetition of history, by pushing up home prices artificially.

A big part of the problem were facing is oversupply and associated housing values that just don’t make sense, hence the huge slide in price.

But prices must continue to fall or we’ll just get ourselves into a similar mess down the road, especially when these ultra-low mortgage rates disappear.

Face it, we can’t manipulate mortgage rates forever, so there will come a time when interest rates jump back to six or seven percent or higher, making it that much more difficult to qualify for financing later down the line.

Especially since home prices aimed to be propped up by these low rates; so how will the new crop of borrowers purchase homes in say, five years?

If home prices are still inflated and interest rates climb back up to historical levels, will we need to come up with a new breed of affordable mortgage programs like interest only loans and option arms so new homeowners can qualify?

I think we need to look at the big picture here, because it’s questionable if lower rates are even the answer.

Most foreclosure victims are deep in negative equity, as noted by a recent report from ForeclosureRadar.com, which said the average foreclosed property at auction in California last month was worth $200,000 less than the balance of the associated mortgage.

So really, does an interest rate reduction that lowers the monthly mortgage payment a few hundred bucks really save us here or just complicate matters?

(photo: kaibara87)

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