6 ms·

It’s amazing rates lock in for 30 years. Are banks still stuck in the 80s too?

by Redoubts 7y ago

lumost 7y ago
Variable interest rates were a thing in the early-mid oughts. It didn't end well.
- mruts 7y ago
  Variable rate mortgages still are a thing. And it's not like there's anything really wrong with them. You are getting a better rate (compared to the newly issued fixed rates), but also getting some rate exposure over the duration of your mortgage. This exposure could help you, or hurt you, but I would hardly call it a bad thing. The problem is that most people don't understand these things and are stupid, and decide to buy a house and sign all the paperwork without reading it.
  - toast0 7y ago
    > This exposure could help you, or hurt you, but I would hardly call it a bad thing. The problem is the amount it can help you and the amount it can hurt you are disproportionate; if the rates fall enough to significantly help you, you could likely have a similar reduction by refinancing a fixed rate mortgage. But, if rates go up, you can't refinance to get a better rate, and you may have trouble selling as you may have planned, because higher interest rates put downward pressure on prices. For me, it seemed like the risk was not worth the reward; especially given I was borrowing in 2009, and rates had significantly more room to go up than to go down. In the 1980s 20+% interest rate climate, I may have chosen differently.
    - caf 7y ago
      Can you really just refinance a fixed rate mortgage that's now priced at an above-market interest rate? Surely the bank has you on the hook to pay that higher interest rate for the remainder of your loan term, they're not going to accept an early termination without some kind of penalty. After all, they've presumably backed your loan with some kind of equally long-term security.
      - thoughtstheseus 7y ago
        Prepayment fees perhaps?
      - sharx 7y ago
        If your original lender were to refuse you could refinance with a different one. Your lender knows this and therefore will let you refinance to keep your business (I'm actually doing this now). You do have to pay loan original fees again though which can be 1-2% of the balance of the loan so you have to compute when it actually pays off for you and whether it's worth it.
      - toast0 7y ago
        You might have to pay a fee to close out the loan early, but mostly the fees are reasonable. If your loan was originated after 2014, prepayment penalties are very limited [1] My lender had a program where you paid a nominal amount (originally $500, but later $1000) and they'll adjust your rate to their then current rate. If you do a full refi, my understanding is that's going to cost in the neighborhood of $3000, although many lenders will roll that into the loan, or otherwise hide it. [1] https://www.nolo.com/legal-encyclopedia/when-are-prepayment-penalties-allowed-new-mortgages.html https://www.nolo.com/legal-encyclopedia/when-are-prepayment-...
        caf 7y ago
        So since it seems like under this system, the lender carries most of the downside risk on interest rate movements while the borrower gets the upside, the lenders must be covering this with a greater spread between their cost of borrowing and the fixed interest rates they charge?
        toast0 7y ago
        Usually yes; the rate for fixed mortgages tend to be higher than adjustable. Looking at rates today, I'm seeing about 3.75% for a 30-year fixed; 3.125% for 15-year fixed, and 4.25% for a 5/1 ARM; but it's more typical in my experience for an ARM to come in near or below the 15-year fixed rates.
  - SilasX 7y ago
    Agree 100%! But in practice, it doesn’t work like that. In a world where the safe, conservative option, taken by responsible borrowers, is the fixed-rate, then the variable rate takers are dominated by the people who are trying to stretch their finances to the breaking point, and that’s why you should worry when you see variable rate mortgages becoming more common.
- nvarsj 7y ago
  Fixed rate mortgages are a uniquely US thing I think - I imagine made possible by government entities securing them. Rest of the world is predominantly on variable rate mortgages - why would a rational lending entity take on the risk of a fixed rate?
  - danmaz74 7y ago
    In Italy almost all mortgages used to be on fixed rates until 2000
  - tomp 7y ago
    AFAIK it's actually the other way around. Banks, hedge funds and other institutions regularly trade "swaps" - instruments that swap variable interest rate for some fixed interest rate - the variable rate is usually "FED rate" or some well-known benchmark, whereas the fixed rate is set to be such that the net present value is zero - so that you can establish such contract without any immediate exchange of money. If anything, it's a huge anomaly that this facility isn't routinely available to retail customers, and an indication of lack of competition within the banking sector in many countries.
    - nvarsj 7y ago
      The mortgage market is giant. I don't think there is enough liquidity to remove all the risk off of bank's books from private investors. This is where the government comes in I believe. Freddie Mac/Fannie Mae buy all the loans off of the banks. Many of these are later sold to investors who want to bet on rates - but I imagine Freddie/Fannie still has huge exposure to interest rate moves.
  - pintxo 7y ago
    Fixed rates are the default in Germany. You would have a hard time trying to find a bank offering a variable rate to a normal customer. They have them, but they are surely not standard and fortunately not offered aggressively. I am unaware of any such regulation, but there probably is one.
    - 7y ago
- lostlogin 7y ago
  They are a thing in New Zealand and have been for a long time. Our rates are a lot higher than the US.
- Erwin 7y ago
  Interesting how mortages vary so wildly between countries. Here in Denmark the variable loans are all below zero. You still pay something as the loan has a management fee on top of the interest, so you can end up paying approx 0.6% in interest in the variable loan that can change every 5 years. The mortage loan can only cover up to 80% of the value of the house, with rest being 5% cash and 15% a more normal, higher-interest bank loan. How much you can loan is based on a multiplier of your household income typically. The 30-year fixed loan is 2% effective interest. And you can also not pay any interest for up to 10 years.
profquail 7y ago
Banks offer both fixed-rate (“locked in”) and floating-rate mortgages (where you pay the prime rate + some fixed number of basis points).
Agathos 7y ago
The only reason anyone can get a 30-year fixed-rate is that the government makes it so, by guaranteeing and eventually taking over Fannie Mae and Freddy Mac.

It’s amazing rates lock in for 30 years. Are banks still stuck in the 80s too?

lumost 7y ago

Variable interest rates were a thing in the early-mid oughts. It didn't end well.

mruts 7y ago
Variable rate mortgages still are a thing. And it's not like there's anything really wrong with them. You are getting a better rate (compared to the newly issued fixed rates), but also getting some rate exposure over the duration of your mortgage. This exposure could help you, or hurt you, but I would hardly call it a bad thing. The problem is that most people don't understand these things and are stupid, and decide to buy a house and sign all the paperwork without reading it.
- toast0 7y ago
  > This exposure could help you, or hurt you, but I would hardly call it a bad thing. The problem is the amount it can help you and the amount it can hurt you are disproportionate; if the rates fall enough to significantly help you, you could likely have a similar reduction by refinancing a fixed rate mortgage. But, if rates go up, you can't refinance to get a better rate, and you may have trouble selling as you may have planned, because higher interest rates put downward pressure on prices. For me, it seemed like the risk was not worth the reward; especially given I was borrowing in 2009, and rates had significantly more room to go up than to go down. In the 1980s 20+% interest rate climate, I may have chosen differently.
  - caf 7y ago
    Can you really just refinance a fixed rate mortgage that's now priced at an above-market interest rate? Surely the bank has you on the hook to pay that higher interest rate for the remainder of your loan term, they're not going to accept an early termination without some kind of penalty. After all, they've presumably backed your loan with some kind of equally long-term security.
    - thoughtstheseus 7y ago
      Prepayment fees perhaps?
    - sharx 7y ago
      If your original lender were to refuse you could refinance with a different one. Your lender knows this and therefore will let you refinance to keep your business (I'm actually doing this now). You do have to pay loan original fees again though which can be 1-2% of the balance of the loan so you have to compute when it actually pays off for you and whether it's worth it.
    - toast0 7y ago
      You might have to pay a fee to close out the loan early, but mostly the fees are reasonable. If your loan was originated after 2014, prepayment penalties are very limited [1] My lender had a program where you paid a nominal amount (originally $500, but later $1000) and they'll adjust your rate to their then current rate. If you do a full refi, my understanding is that's going to cost in the neighborhood of $3000, although many lenders will roll that into the loan, or otherwise hide it. [1] https://www.nolo.com/legal-encyclopedia/when-are-prepayment-penalties-allowed-new-mortgages.html https://www.nolo.com/legal-encyclopedia/when-are-prepayment-...
      - caf 7y ago
        So since it seems like under this system, the lender carries most of the downside risk on interest rate movements while the borrower gets the upside, the lenders must be covering this with a greater spread between their cost of borrowing and the fixed interest rates they charge?
        toast0 7y ago
        Usually yes; the rate for fixed mortgages tend to be higher than adjustable. Looking at rates today, I'm seeing about 3.75% for a 30-year fixed; 3.125% for 15-year fixed, and 4.25% for a 5/1 ARM; but it's more typical in my experience for an ARM to come in near or below the 15-year fixed rates.
- SilasX 7y ago
  Agree 100%! But in practice, it doesn’t work like that. In a world where the safe, conservative option, taken by responsible borrowers, is the fixed-rate, then the variable rate takers are dominated by the people who are trying to stretch their finances to the breaking point, and that’s why you should worry when you see variable rate mortgages becoming more common.
nvarsj 7y ago
Fixed rate mortgages are a uniquely US thing I think - I imagine made possible by government entities securing them. Rest of the world is predominantly on variable rate mortgages - why would a rational lending entity take on the risk of a fixed rate?
- danmaz74 7y ago
  In Italy almost all mortgages used to be on fixed rates until 2000
- tomp 7y ago
  AFAIK it's actually the other way around. Banks, hedge funds and other institutions regularly trade "swaps" - instruments that swap variable interest rate for some fixed interest rate - the variable rate is usually "FED rate" or some well-known benchmark, whereas the fixed rate is set to be such that the net present value is zero - so that you can establish such contract without any immediate exchange of money. If anything, it's a huge anomaly that this facility isn't routinely available to retail customers, and an indication of lack of competition within the banking sector in many countries.
  - nvarsj 7y ago
    The mortgage market is giant. I don't think there is enough liquidity to remove all the risk off of bank's books from private investors. This is where the government comes in I believe. Freddie Mac/Fannie Mae buy all the loans off of the banks. Many of these are later sold to investors who want to bet on rates - but I imagine Freddie/Fannie still has huge exposure to interest rate moves.
- pintxo 7y ago
  Fixed rates are the default in Germany. You would have a hard time trying to find a bank offering a variable rate to a normal customer. They have them, but they are surely not standard and fortunately not offered aggressively. I am unaware of any such regulation, but there probably is one.
  - 7y ago
lostlogin 7y ago
They are a thing in New Zealand and have been for a long time. Our rates are a lot higher than the US.
Erwin 7y ago
Interesting how mortages vary so wildly between countries. Here in Denmark the variable loans are all below zero. You still pay something as the loan has a management fee on top of the interest, so you can end up paying approx 0.6% in interest in the variable loan that can change every 5 years. The mortage loan can only cover up to 80% of the value of the house, with rest being 5% cash and 15% a more normal, higher-interest bank loan. How much you can loan is based on a multiplier of your household income typically. The 30-year fixed loan is 2% effective interest. And you can also not pay any interest for up to 10 years.

profquail 7y ago

Banks offer both fixed-rate (“locked in”) and floating-rate mortgages (where you pay the prime rate + some fixed number of basis points).

Agathos 7y ago

The only reason anyone can get a 30-year fixed-rate is that the government makes it so, by guaranteeing and eventually taking over Fannie Mae and Freddy Mac.