Question for finance / economic experts

[kthroyer]

****I Admit that I don't know anything about Economics*****
****This is probably a stupid question******

But here it is anyway:

I was thinking about my current financial situation, and what would be the one thing that would make the most change in my budget. It's pretty obvious that most people's, including myself, largest monthly expense is their mortgage payment. Currently my mortgage rate is 6%, which I am aware is a bit high for the current rates, but if it were half that at 3% it would make a big difference in my budget.

If the government could somehow create a program where mortgages could be financed at a much lower rate than current rates, I think that would stimulate a lot of areas of our economy.

I'm guessing there must be some serious negatives to lowering interest rates that much, but I admit that I am very uninformed when it comes to this subject. I know that the Fed changes the rate at which it loans money to banks, and it is probably very low right now. So I am not sure how it could be done. It just seems like we pay way too much money to banks right now for mortgage interest. Their profit margin for these loans seems to be way different than any other type of business.

Could someone tell me why my idea is not valid or why this could never happen?

I think this would stimulate the housing / construction industry, and also put money in the pockets of the typical homeowner.

 

[FelixDeCat]

http://uk.reuters.com/article/.../idUKN1247259120090212

WASHINGTON, Feb 12 (Reuters) - The Obama administration is hammering out a program to subsidize mortgage payments for troubled homeowners who have gone through a standardized re-appraisal and affordability test, sources familiar with the plan said on Thursday.

The program would be a major break from existing aid programs, which are triggered once homeowners fall into arrears. Under the plan being contemplated, mortgage companies would use a uniform eligibility test even before a borrower becomes delinquent, sources said.

The administration hopes the mortgage industry will soon agree to a set of standards that will allow it to move quickly to modify many home loans.

Sources said government-controlled housing finance companies

A subsidy would work like this, say your payment is $1000 per month with taxes and insurance included. The gov would put up $300 per month for 1 year or more and that would lower your overall payment to $700 per month, stimulating the economy and helping you keep your home.

I dont support this idea however, since this will likely mostly stimulate the Chinese economy since we usually buy everything from them anyway. But Im not wholly opposed to it either. If it passed, I wouldnt care.

 

[dullard]

Originally posted by: kthroyer
Their profit margin for these loans seems to be way different than any other type of business.

Exactly. Car loans are 7%-10%. Credit cards are 13%-29%. Payday loans are 150%-500%. At 5% interest rates, mortages DO operate different than any other similar type of loan business. But, they operate on the cheapest side by far (the opposite of what you were thinking).

The fed is a meeting of bank representatives with one government appointed representative (Bernanke). Remember that, it is mostly a private (non-governmental) entity. Since the fed is mostly private, the government has very little say with what they do. The fed sets rates that banks lend money to each other. The fed does NOT set rates for individual loans. That is a whole other beast.

The rate that banks charge depends on what the rate they must pay their investors. Wealthy people, corporations, and governments often want a relatively safe but solid investment. So, these wealthy people essentially buy mortgages and other loans from the bank. When these people buy the mortgages they expect a return; they want to earn interest on their money. The bank likes it, because they pocketed the closing costs on the mortgage, they skim a bit of the interest, and then they get their money back in order to make another mortgage. If you set the interest rates on mortgages low, then that means that the wealthy people will be getting next to nothing for their money (and they'd be losing money on people who foreclose). So, your idea will essentially end this form of investment. With no money to be made by purchasing mortgages, no one will purchase them. That means that banks can't sell their mortages - meaning that they don't have money to lend. The whole economy would collapse.

About the best you could do is to have the interest rates set by the investors/banks as they are now, but have the US government pay part of your interest for you. Oh wait, they already do by letting you deduct interest on your income taxes.

 

[kranky]

That's $180/month difference per $100,000 financed on a 30-year loan. I can't see how that would make a big impact on anyone's budget.

On a $100,000 mortgage, financing $30K less is the same impact as reducing the interest rate from 6% to 3% on a 30-year mortgage.

 

[Capt Caveman]

OP - you could always refinance your mortgage to under 5% now

 

[dullard]

Originally posted by: kranky
That's $180/month difference per $100,000 financed on a 30-year loan. I can't see how that would make a big impact on anyone's budget.

I think that $180*12 = $2160 extra a year will really have a huge impact on struggling familes. Any case where a families that went from two incomes to one or where someone had to take a lower paying job due to a layoff would greatly benefit from $2160 a year. That is almost enough to put food on the table for a small family for the year (assuming they buy cheap food).

 

[kthroyer]

Originally posted by: dullard

Exactly. Car loans are 7%-10%. Credit cards are 13%-29%. Payday loans are 150%-500%. At 5% interest rates, mortages DO operate different than any other similar type of loan business. But, they operate on the cheapest side by far (the opposite of what you were thinking).

Thanks for the response Dullard. I guess it just "seems" like the profits are out of whack. I just calculated how much the average interest that I will pay per month over the length of my mortgage ($160,000) and it was $514/month. Not arguing with you, just saying how it appears to me. I mean they get my house if I default, if I have paid a few years worth of P&I, you would think that the last 27 years of interest is profit.

But then again see my warning at the beginning of the thread

 

[kthroyer]

Originally posted by: kranky
That's $180/month difference per $100,000 financed on a 30-year loan. I can't see how that would make a big impact on anyone's budget.

On a $100,000 mortgage, financing $30K less is the same impact as reducing the interest rate from 6% to 3% on a 30-year mortgage.

I guess for my situation it would be more like $300 a month, and I feel like that would make a difference for me.

 

[Barfo]

Originally posted by: kthroyer

Originally posted by: kranky
That's $180/month difference per $100,000 financed on a 30-year loan. I can't see how that would make a big impact on anyone's budget.

On a $100,000 mortgage, financing $30K less is the same impact as reducing the interest rate from 6% to 3% on a 30-year mortgage.

I guess for my situation it would be more like $300 a month, and I feel like that would make a difference for me.

 

[kthroyer]

Originally posted by: Capt Caveman
OP - you could always refinance your mortgage to under 5% now

I have been thinking about it, but I have a home equity loan that puts me at less that 20%, so I would have to pay PMI.

I also don't really want to start over on a 30 year mortgage. If I could refi at 20 years and keep my payments the same, I would do it in a second.

 

[dullard]

Originally posted by: kthroyer
Thanks for the response Dullard. I guess it just "seems" like the profits are out of whack. I just calculated how much the average interest that I will pay per month over the length of my mortgage ($160,000) and it was $514/month. Not arguing with you, just saying how it appears to me. I mean they get my house if I default, if I have paid a few years worth of P&I, you would think that the last 27 years of interest is profit.

You are welcome. Your $514 calculation is correct. It is is quite disheartening to pay $959 a month in P&I and only see your balance go down by $159 in the first few months. You are paying almost all interest at the beginning. But it does get better. As long as you stay in that house for 30+ years OR move to equivalent houses in that 30+ years, you will stay at that average $514/month figure. True, you also have properly taxes and insurance, so lets call it $800/month. But you save on income taxes, so lets make it $750/month.

Now tell me, what apartment can you rent that is as big and as nice as your house for $750/month for the next 30 years? In many areas, it would be hard to get an appartment for $750/month now. But, even if you can get an equivalent rental for $500/month now, it'll be nearly $1500/month by the time 30 years pass. You'd average $900/month in an appartment, easilly. Yes, housing is pricey NOW. But it'll usually be cheaper in the long run.

 

[spidey07]

So you want gubment to own all the homes and mandating interest rates the private companies charge? DO NOT WANT!

OP - you are somewhat on the right track trying to think outside to box on stimulus but the problem is people are not buying, even with almost historically low rates now. Gubment should incent buying, not incent low interest rates - the 15K tax credit for buying a home with no income caps was a brilliant idea that got axed by the house.