Interest Rate Trends What History Tells Us About Real Estate Loans

Is there a correlation between the Prime Rate and Mortgage Rates?  Lets look at history

Prime Rate History 1949 to 1999

Prime Rate History 1995 to 2005

Conforming Fixed Rate Mortgages 1992 to 2005

Rate Comparisons  Prime Rate30 year Fixed  % %  % %  % %  Today-6.00%Today-5.875%

Will they rise?  Most likely  How much? (any ones guess)  However:  New home construction is the heart of the economic recovery  Prices are beginning to exceed average buyer capability  Demand still exceeds supply in desirable locations

Is Credit Tightening  Yes and No  2002 major push of option ARM allowing borrowers to pay interest only payments  /1;5/1,7/1 & 10/1 interest only fixed rate loans expand in market place  2005 CalHFA introduces interest only loan for first-time home buyers  April 2005 major banks decide to increase minimum payments on consumer revolving debt from 2% to 4%

Interest Only verses P&I  Loan Amount = $300,000  Interest Rate = 6.00  30 Year P & I = $  Interest Only = $  Borrower Leverage:  Borrower additional $59,000 for same Payment

Borrower Qualification  Old Rule:  28/36 debt ratio’s  5% of revolving debt included in ratio  New Rule:  FICO SCORE; FICO SCORE; FICO SCORE  Automated Underwriting  Some times you might qualify with a 50% debt ratio

Outlook for Mortgage Industry  As rates rise they will meet the challenge of creating programs to help borrowers to qualify and keep houses selling  Just remember:  When you bought your first house was there 100% financing available other than a government subsidized program

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