I can understand that a credit card can give a “low intro rate” for a year because a year is a short time. Even if there is a big rates swing in the near future, they wouldn’t be stuck with the low rate for long.
But how come there are still fixed rate mortgages for many years ahead in America? What are the issuing banks planning on doing if during this upcoming decade there will be lots more deficit spending followed by rates increases to attract the funds?
A fixed-rate mortgage is profitable as long as the rate beats inflation and the buyer doesn’t default. Potential future interest rates don’t really enter into it.
they do what they have been doing for many years-immediately sell the mortgage to someone else. The banks don’t take any risk with a mortgage. Fannie and Freddie take the risk. And while those agencies are losing money now the losses are primarily from earlier “liar loan” days. Current mortgages that they are buying are profitable. addressing your OP, whether they will be profitable in the future is the next executive’s problem. This year’s bonus is determined by this year’s profit.
Banks and buyers of mortgage-backed financial instruments can also manage their risk via the use of interest rate swaps and cap and collar-type products. Similar in a way to insurance companies managing their risk via reinsurance.
Indeed. Banks are constantly exchanging fixed rate risk for floating rate risk (and vice versa) via interest rate swaps.
so Fannie and Freddie are now using federal money to buy 4% fixed rate mortgages that, given the current and projected federal spending policies, will soon end up significantly below the annual rate of inflation?
If the loan payments on the mortages are low, then they should be cheap to buy.
Here’s a brief example of how the bond market (and by extension, the fixed rate loan market) works:
Bond A has a face value of 100 dollars, matures in 2020 and pays an interest rate of 3%. So it might cost you 98 dollars to buy (i.e. it’s sold at a discount to face value).
Bond B has a face value of 100 dollars, matures in 2020 and pays an interest rate of 8%. So it might cost you 105 dollars to buy (i.e. it’s sold at a premium over face value).
It’s not the case that every bond (or loan) costs 100 dollars to purchase so that everyone buys bond B and no one buys bond A. That would make no sense.
If you really knew that interest rates would be rising and when, you could make a lot of money. But you don’t.
First, the Fed has guaranteed a virtually zero federal funds rate through 2013. The economy is growing at about a 2% annual rate. Overall consumer inflation remains low. There won’t be any inflation for as far out as anyone can legitimately claim to see. That removes a source of uncertainty for the near term.
And the near term is all that matters. Nobody can predict long-term trends. And nobody needs to, especially in the mortgage market. The percentage of people who keep a 30-year mortgage to the end are infinitesimal. The vast majority of people move long before that. Mortgages end when that happens. So the realistic long-term for a mortgage is no more than about five years. Since the majority of payments in the first five years of a mortgage go only to covering interest rather than principal, it’s practically a certainty that the bank will make a profit.
Hahaha holy shit. This is what people actually believe.
There are also a few other reasons a fixed rate would be offered.
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This is GQ. Belittling other responses (and those who post them) does nothing to answer the question.
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