Comments | angerona: Confused

angerona

Confused

Jan 02, 2009 09:55

Mortgage quotes like these (These are from http://www.mortgage101.com/Articles/DailyRateSurvey.asp but I've seen similar ones elsewhere) make me feel that I know nothing about the way mortgage industry operates.

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financial, observations, current events, interesting, english

Comments 43

dmpogo January 2 2009, 18:43:16 UTC

It is not infrequent. When I was buying my house, the "sweet spot" of fixed mortgages was 7 year, which cheaper than both 5 and 10 year ones.

It is partially price manipulation to steer the customers to specific products.

angerona January 2 2009, 21:25:53 UTC

I suppose that's true, too, but it was strange to see such upside-down rates everywhere.

dmpogo January 3 2009, 05:31:38 UTC

On the other hand, it actually makes sense. If I sell fixed-rate mortgage, I would like to lock the client into as long term as possible over which I have a (reasonble) prediction that the primary rates will stay below (plus some margin) that fixed rate.

That means that if the current rate is low, there is some optimal term for the lender.
Shorter - client is not locked long enough, longer - I am risking that the rates will exceed the current and I'll be loosing profit. As the result, one would not expect a price to monotonically increase with the term length.

angerona January 3 2009, 20:29:13 UTC

On the other hand, it actually makes sense. If I sell fixed-rate mortgage, I would like to lock the client into as long term as possible over which I have a (reasonble) prediction that the primary rates will stay below (plus some margin) that fixed rate.

Not exactly. Otherwise we'd all be in the business of lending. The point is that lending is a risky business, and the longer the term, the bigger the risks (after all, there are lots of other things you could be doing with your money. Every time you give out a loan, you are foregoing all the other opportunities).

izsandiego January 2 2009, 21:23:20 UTC

I think interest rate = cost of money + inflation + credit risk.
Inflation is clearly a function of time.
But this is my total IMHO.

angerona January 2 2009, 21:25:29 UTC

well yes, and that reasoning would make 15yr loans more attractive to banks than the 30yr ones.

izsandiego January 2 2009, 21:47:31 UTC

Nominal interest rate is not the real interest rate. What seems low may not really be low. What if there is a serious deflation (think Japan) a few years down the road? Locking up reasonably high real interest for that long (30 years) would make sense.

Again, it is pure speculation. In reality this is most likely a result of some financial @$%* up.