This is mostly because US has these crazy 30y fixed mortgages right? Everyone who owns a loan like that is sitting on huge gains and will find it very difficult to sell given the effective loss they would realise - transitioning to another house at a 4 percentage point higher interest rate will cost them a ton of money.
I was amazed to realise that in the US they can have multiple decade long fixed mortgages. Do they also have the ability to refinance long term to a lower rate if it becomes available?
In Australia, we have fixed and variable with all fixed rates being locked for only a number of years. So you are always going to have the bear increases in mortgage rates if they occur.
Yes. There are fees associated with a refinance so it might not make sense if you don't plan to be in the house for at least a few more years.
But I've refinanced twice (two different houses) once to get a lower rate and once to both get a lower rate and shorten the term to 15 years.
The real key is to NOT take equity out when you do this. Many people do but that's like starting over with a higher mortgage balance. Just refinance the outstanding balance if it makes sense, and do not reset the term back to 30 years. I'll have a fully paid-off house in a few years that I plan to retire in with only taxes and insurance to worry about.
Normally yes: in France we also have 30y fixed-rate mortgages (in fact, nobody sane would do variable: there's no upside except for the bank). If the rate gets way lower, you can pay the advance repayment fee and reborrow, so the banks directly just cut your rate, everyone does it. And if the rate goes up, the banks swallow the losses.
There have been discussions in parliament for decades about the prevalence of fixed rates and the cost it has for the banking sector, but it's nearly impossible now to change it. Banks simply have to make less money, and expand abroad if they want to do more predatory variable rates. The French philosophy is that banks should not speculate too much on mortgage profits and accept to make some but not optimal profit there. Suffice to say that our banks are struggling a little bit more than say British banks.
The United States is unusual in the high proportion of long-term fixed-rate mortgages. Long-term fixed-rate pre-payable mortgages used to be the dominant product in Denmark, but low and falling short-term rates have led Danish borrowers to shift to medium-term (one- to five-year) rollover mortgages in recent years. France is the only other country with a majority of fixed-rate mortgages. Unlike the penalty-free pre-payable Danish and U.S. FRMs, French fixed-rate loans have pre-payment penalties (maximum three percent of outstanding balance or three months' interest). German mortgages can be fixed up to 15 years with a 30-year amortization.
The upside is typically that variable rates are typically lower by one percent or more - for example, my local CU is quoting 6.875% today for a 30 year fixed but 5.5% for a 5/1 arm. But that variability and sudden change in payment when the rate adjusts was apart of what caused the '08 mortgage crisis (played a part in people being unable to afford the higher payments and being foreclosed on).
Not sure how it works in Europe, but if it's similar to the U.S., the issue is similar to what happened to SVB - they invested a large portion of their cash into low-rate mortgage-backed securities, so when the rates rose, the actual value of the mortgage-backed securities dropped, making it hard to sell them without losing a bunch of money (which was deposits, not their own revenue/profits). The FED did guarantee all money in all accounts - even past $250k - but it's not a great look to be taken over by the fed to ensure money is available for withdrawal to depositors.
It was all within the Fed's fund rate guidelines so I'm not sure how it was so scammy. Or does the the typical bank have a larger amount of short-term investments that can be easily liquidated in case there's a bank run?
>Do they also have the ability to refinance long term to a lower rate if it becomes available?
Yes. You can also borrow against whatever equity you have in your house. Say you bought a house for $200 and it's now worth $250, you can borrow against part of that $50K equity if you refinance, for example if you need a new roof. I don't think you can borrow 100% of your equity though, I seem to remember 80%. It's been a while since I've done it.
80% is the limit for what can easily be resold to Freddie Mac or Fannie Mae - government programs that buy conforming loans and guarantee and resell them as bonds.
Did you actually save a lot of money from doing this? Those refinance fees and origination fees can be pretty hefty, typically 1% of the value plus fees like credit score, appraisal, recording, etc.
You need to find a broker who's willing to eat most of the costs. That's easier in the Bay Area where mortgages are high dollar so that they still make enough money to make it worthwhile.
I don't have closing statement with me, but the total cost is way lower than 1%.
And, yes, I obviously had a spreadsheet to evaluate the different scenarios.
It’s quite easy to do the math (you can find a spreadsheet or setup your own) and it will give you an exact date for when one option passes the other(s).
We had a worst-case scenario where a highish fixed rate was underwater for quite awhile, but when it finally wasn’t the payoff time for a refinance at a lower rate was in the matter of one or two months (the monthly payment got cut in half or so).
How is it crazy? How else could one reliably afford to buy a house? The main lesson of the 2008 housing crisis, as I saw it, was that adjustable-rate mortgages are untenable; I certainly would never sign up for one, because it leaves you too vulnerable.
There are two sides to the transaction. The lender is offering a fixed rate loan for 30 years, with no option to call for early repayment. However, the borrower does have the option to repay early at their discretion. In exchange for this massive assymetry, the borrower pays a premium of about 60 basis points over an adjustable rate with 5 year initial rate lock.
Broadly speaking, this product makes no sense. If interest rates go up, the value of the loan goes down. If interest rates go down, the value of the loan goes up ... until the borrower unilaterally refinances and pays of the loan at face value.
Indeed, no bank actually holds fixed rate loans. Instead they immediately sell it to Fannie May/Freddie Mac, which were created by the government specifically to allow for a product as absurd as the 30 year fixed rate mortgage to exist.
The existence of this product inflates prices, making it difficult for people to buy except with a 30 year mortgage.
The real winners are those who own before the government enforces new price inflation policies on the market. (The only reason we have 30 year fixed mortgages is because of government intervention in the market.)
How does this work? Are people just routinely evicted when the rate goes up and they can't afford the payment anymore, or is there some reason this doesn't happen?
From my US perspective, I would rather rent forever than risk such a loan, so I suppose there must be something else at play which makes your approach less awful than it would be if we did that here.
Adjustable Rate Mortgages destroyed a lot of people’s wealth in the US back in the housing bubble. I don’t know if the laws are supportive of borrowers in the UK, but in the States ARMs have a bad reputation that they probably won’t shed for 2-3 generations.
Key is not overextending too much. Which I think was one of key issues in that collapse.
Also adjustable rates have been amazingly cheap in past and still are not that expensive. Like sub 1% total. And my adjustable rate loan would be 4.425% if it adjusted today.
We’re in the same boat. We live in an apartment building in a neighborhood we love. Recently, a larger apartment in our building came onto the market. The seller is desperate to offload and the size would really suit our family’s long term needs. However, the double whammy of the loss we’d take selling our unit while paying a higher mortgage at a higher interest rate is just too much to stomach.
Yes, a lot of my friends are "trapped" (not really they're actually quite happy about it) in their houses because they have 2-3% interest rates locked in which is today is almost free money.
It's not a loss if they're still net positive from their unrealized gains. It's basically the home ownershipt version of "I know what I've got" but they in fact don't.
One Example: you can get a "Home Equity Line of Credit" (HELOC) against your house, then use that money to do things, e.g., remodeling (the interest from such loans is in some cases tax deductible). The house you would own with a 3% interest rate is likely worth significantly more than the house you would own with a 7% interest rate, so the potential impact of a HELOC is higher.
