Recently I read that Senate Republicans are proposing an amendment to the Obama stimulus plan which calls for 4% mortgage rates for all credit worthy borrowers who want to refinance. I think this could potentially be a true stimulus to the economy, and here is why.
First of all, I think very few people have a 4% fixed mortgage right now. That rate is pretty much unheard of since mortgage products were invented. This means that a lot of people stand to save money month over month. For a person who has a 6% rate, a refinance to 4% means that they would save 33% on their mortgage. For a typical mortgage in California consumers can save anywhere from $200 to $500 a month, and that is a much better boost than a one time $500 or $600 tax rebate. That extra money can go into savings or be spent on other things. Since prices have come down on many items in this economy, it is likely consumers will spend their money if they have it.
Second, banks can definitely afford to lend out at 4% because the government already cut the interbanking lending rates drastically. In fact, they are pulling in more profits than ever even when they lend more than 5%. Historically, the difference between the 30 year mortgage rate and the 10 year treasury rate is 1.7 percent. Now it is around 3.3%, so banks can afford to cut the rate and still be profitable. It is pretty unfair that these banks are getting all of the benefits of the current mess even though they created, and perhaps they should do their part in helping consumers now.
Finally I like the plan because it rewards responsibility. If people with good credit can refinance at the low rates then it encourages good personal finance behavior. Instead of letting all the bailouts go to those who spent too much too fast, maybe it is time to help those who are working hard and being accountable to their own debts. The economy can be really stimulated if people have trust in the financial system again and start investing and spending, and I think this would be a good start.
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5 comments ↓
I’ve been waiting on the sidelines to purchase a new home. If the interest rates were to fall to 4% and the potential $20,000 first-time home buyer credit would be approved, I don’t why I wouldn’t take advantage of that and purchase a house.
The only downside is that sellers may increase their prices to capture more capital.
Stupidly Yours,
Matt
“..means that they would save 33% on their mortgage”
Not really… It’s only the “mortgatge interest” that is saved, in the signed 3 years.
In the next term, when you have to refinance again, you might not be able to get the same rate, if all the banks hike the rate (as usual).
So, can we save “from $200 to $500 a month” in these 3 years? it really depends on the repay plan.
I don’t have my financial calculator handy. If the mortgage is 200,000, and we plan to pay it in 20 years, how much we need to pay if the interest rate is 6%, or 4%?
Some people will take advantage of the low mortgage by paying MORE in these 3 years. They stop spending money on other things, because they know the rate will go up later!
As a renter who still isn’t ready to buy, I feel pretty left out of all this stimulus stuff.
But I do think you are right, this could really help out a lot of responsible people.
You are right, it’s 33% savings on the mortgage interest, but in the first 7 to 10 years of a 30 year loan most of people’s mortgages are mostly interest. So the savings are significant enough. Additionally, from what I read it seems that the government wants to offer a 30 year 4% fixed rate for about 1 to 2 years. Which means whoever refinances within these 1 to 2 years can get a 4% rate for 30 years. It’s not that the rate will go up after 3 years.
The interbank rate is low, but that rate is for short term loans. A 30-year loan at 4% might be profitable for a bank in the short term, but if the economy is booming again in, say, 10 years, and the bank has to offer 5% interest on savings accounts and CDs to get deposits, then it doesn’t look so good.
Also, easy credit and low (many would say artificially low) interest rates were a big factor in this mess. Keeping long term interest rates low by legislative fiat will not get us out.
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