How Much Lower Can Mortgage Rates Go?

Something to keep in mind as the resurrection of the real estate market kicks into gear- and hopefully sooner rather than later. This might be the time to buy and get in when you can get interest rates at their historic lows. Timing the mortgage rates may be a tough task. Here is a little information from Elizabeth Martinez in Miami to give you some food for thought. Log on to my website to see the latest foreclosure properties in the Keys at www.keystropicalproperties.com. Rhonda

How much lower can mortgage rates go?
Top News
Wednesday, 29 September 2010 17:52
By Elizabeth Martinez

Miami, FL- Just last week, reports from Freddie Mac's weekly survey showed that rates were averaging 4.37%. Rates on 30-year fixed-rate mortgages have dropped more than a percentage point since June 2009. With mortgage rates dropping like this, and the financial situation showing no improvement yet, many have started to wonder how low mortgage rates can really go.


Some analysts in the mortgage industry suggest that mortgage rates could keep going down in the direction of 0%. Rates will receive additional pressure as the Federal Reserve recently indicated that it is willing to take extraordinary steps to keep the economy growing.

"So long as the Fed allows the word 'deflation' to get bandied about, mortgage rates will ease lower," said Dan Green, a loan officer with Waterstone Mortgage in Cincinnati.
It is not unreasonable to say that mortgage rates could keep declining from their current level. Even two years ago when mortgage rates were much higher, very few would have believed that mortgage rates could get down as low as they are now. So, it is very likely due to the current situation that mortgage rates could continue moving down.

"In theory, the only stopping point is 0%—that's where all nominal interest rates have to stop," said Mike Larson, real-estate analyst for Weiss Research.

Larson said that a 0% mortgage could be compared to the 0% financing that has been in place for a long time in the auto industry. In addition, home builders also have been known to pay down mortgage rates for their clients. So, introducing lower rates than the ones we have right now wouldn’t be completely unheard of, at least for a period of time, explains Larson.

“But mortgages are different from car loans. Do I think we will see [0% mortgages] in our lifetimes? No, I don't," he said.

Furthermore, it is not very clear how a 0% mortgage could be funded. Jim Sahnger, a mortgage planner with Palm Beach Financial Network said that in essence, to fund a 0% mortgage, the investor would get a negative return—"unless there were significant fees on the front to compensate for costs to originate, deliver, default, etc."
Although unlikely, if rates do fall to or near 0%, this could bring more first-time home buyers to seek out extremely favorable financing for a house, Mr. Sahnger said. If you get more buyers in the mix, the demand for homes could kick up, thus helping home prices rise, he said.

Assuming that the 0% scenario is possible, the issue will come up with the eligibility for this type of mortgage rates. Eligibility would become an issue as the number of homeowners who are underwater on their mortgages has increased greatly. In addition, borrowers need income and a good credit score to be eligible for a mortgage. Recent studies from Zillow Mortgage Marketplace found that nearly one-third of Americans are unlikely to qualify for a mortgage due to their low credit score. Furthermore, only 47% of Americans qualify for the best rates (these are borrowers with credit scores of 720 or higher).

Because of the difficulty eligibility just mentioned, without the help of a government program, many of those homeowners are not able to refinance.

"We are in an era of historically low mortgage rates, reaching levels not seen in decades. Coupled with four years of home-value declines, homes are more affordable than we've seen for years," said Stan Humphries, Zillow's chief economist. "But the irony here is that so many Americans can't qualify for these low rates, or can't qualify for a mortgage at all."