After years of simply amazing interest rates, 2006 turned out to be a bit of a watershed in the mortgage industry. With 2007 just a step away, what can we expect in the home loan market?
The 2007 Mortgage Market
From 2000 through 2005, we saw a historic period in the money borrowing market. As the Federal Reserve Bank sought to battle market forces and stimulate the economy, it set borrowing rates at historic lows. These rates allowed banks to borrow money at next to nothing and then issue loans to home buyers at unheard of rates. In 2006, of course, we saw interest rates start creeping back up. So, what does this mean for borrowers in 2007?
2007 is going to be an interesting year in the mortgage industry. On one hand, many expect the Federal Reserve Bank to flatten out rates or perhaps raise them gradually to fight inflationary issues. What the “Fed” does is important because it sets the rate at which banks can borrow money.
If rates do not lower, a gap will be created between the current real estate market and people that borrowed at really low rates during the 2000 to 2005 period. Simply put, those borrowers are suck in a bad place because they have little or not financing options that don’t result in major increases in their monthly payments. Many of there borrowers got into their homes through interest only and hybrid loans. While there was nothing wrong with such approach, the favorable terms of these loans are ending. Most borrowers now need to refinance, but cannot because rates have risen to the point where they can’t afford the monthly payments that would result from refinancing their debt. If this trend continues, it could be a very ugly year for the mortgage industry in 2007.
There is some hope at the end of the tunnel for borrowers looking to refinance. The question is whether it is a positive light or a speeding train. The hope comes in the slowing economy. All indications point to an economy that is rapidly slowing down. In such situations, the Fed often will cut interest rates to give the economy a jump start. If this occurs, the rates on refinances should drop to figures that many homeowners can afford in relation to monthly payments. If this does not occur, the foreclosure market is going to get very interesting.
In my opinion, 2007 is a year of reflection for most homeowners. It is time to pull out your mortgage documents and figure out where you stand on rates and payments. If you see a need to refinance on the horizon, it is best to deal with it now before things get crazy.
Dan Lewis is with Great Western Mortgage - providing
home loans across the country.
