An FHA Tale of Two Cities

by Peter G. Miller
February 17th, 2010

The Moscow Times reports that interest rates for fixed-rate ruble mortgages have now dropped to 15.8 percent — that’s down from 20 percent last June.

Alternatively, Zillow says the rate for thirty-year fixed mortgage rate fell to 4.79 percent this week. Zillow also says “the rate for 15-year fixed home loans is currently 4.22 percent, while the rate for 5-1 adjustable rate mortgages is 3.61 percent.”

Think of the financing you can get in Moscow and compare it with New York or Los Angeles, Chicago, Dallas, etc.

These contrasting reports tell us several things.

First, for all the financial troubles we have in the US this is the place where capital goes. There’s far less risk here so people are willing to lend at ridiculously-low rates to keep their money within our borders.

Second, notice that the starting rates for adjustable-rate financing is just a little bit more than 1 percentage point below the low, low fixed rate. To put this as nicely as possible, getting an ARM at a time when rates are so low only makes sense if you think rates will go still lower in the future and if you need the more liberal qualification standards that lender use to entice ARM borrowing.

Freddie Mac says that in the fourth quarter of 2009, “refinancing borrowers overwhelmingly chose fixed-rate loans, regardless of whether their original loan was an adjustable-rate mortgage (ARM) or a fixed-rate.”

“While 30-year fixed-rate mortgages are still the most preferred product chosen for the new loan, 15-year fixed-rate mortgages gained favor among refinancers who previously held 30-year fixed-rate mortgages, balloon mortgages and ARMs. Overall, fixed-rate loans accounted for more than 95 percent of refinance loans during the quarter.

“Average interest rates fell on 30-year and 15-year fixed-rate mortgage loans in the fourth quarter to a record low in the 39-year history of Freddie Mac’s Primary Mortgage Market Survey,” said Frank Nothaft, vice president and chief economist for Freddie Mac. “The lowest fixed-rate interest rates in more than a generation, coupled with the comfort that a constant monthly principal and interest payment provides the homeowner, are important drivers in fixed-rate product choice.”

FHA Loans

In terms of FHA mortgages the same principle applies: Why would anyone want an adjustable-rate product at this time when fixed-rates can be locked-in for 30 years? And the rates for 15-year financing are even more ridiculous.

Does anyone really believe that interest rates will go materially lower? That they will be lower or as low in three to five years?

We already have seen investors buying Treasury securities at rates below zero — meaning that in exchange for the safety of a Treasury investment they’re willing to accept an absolute loss, one known in advance. Why? Because they worry about non-government stocks and bonds. And, of course, no one is taking their cash and fleeing to Moscow despite the higher rates.

If you need to finance or refinance now is certainly a wonderful time to be in the marketplace for a mortgage. And if you get an FHA loan — fixed I hope — you get the safety of a proven program with sane terms and today’s rates. That’s a great combination.

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