Will 4.5 Percent Interest Rates Soon Become a Reality?

by Mark Wellborn

Will 4.5 Percent Interest Rates Soon Become a Reality?

It is now widely-known that the Treasury Department is considering a plan that would encourage banks to drop interest rates for new home loans to 4.5 percent, a full point lower than some of the lowest rates currently available for standard 30-year fixed-rate mortgages. Even though the plan is in its very early stages, just the talk that rates might drop to these historically low levels (and the fact that just yesterday the Federal Reserve cut its benchmark interest rate to almost zero) has gotten the attention of prospective home buyers. But with rates that are already lower than they have been in years (under 6 percent), does it make sense to wait for something that may never come?

“I think the people that are on the fence (to buy) are saying to themselves that they should wait to see if it actually happens,” Mandy Mills of Hounshell Real Estate told UrbanTurf. “People who are ready to buy are not waiting around.”

Mills’ partner David Getson was more emphatic.

“Quite frankly, I think the media is doing a general disservice to the market as a whole by putting the 4.5 percent number out there,” Getson said. “At this point, the details are very unclear, particularly who can actually qualify for the new rate.”

Getson is correct in that, at this point, very little is known about the program. However, the general perception is that the proposed plan will only help those who want to buy homes, not those who want to refinance. It is also thought that steady employment and a good credit history will be criteria that will be needed to qualify.

Let’s imagine for a moment that rates are cut to 4.5 percent. That means that if you put a 20 percent down payment on a $500,000 home, your loan payments will come to about $2,000 a month (assuming you get a 30-year fixed rate mortgage). Compare those payments with what you would be paying at 5.5 percent, and you are saving about $250 a month. Here are a few more monthly payment comparisons, based on a 30-year fixed rate mortgage:

Home Price Loan (80%) 5.5 Percent 4.5 Percent Monthly Savings
$250,000 $200,000 $1,135 $1,013 $122
$375,000 $300,000 $1,703 $1,520 $183
$625,000 $500,000 $2,838 $2,533 $305

While certainly enticing, these numbers could have the unfortunate result of people thinking that they can afford something they can’t. In other words, the low rates may tempt buyers to go one step above the property that they would’ve otherwise purchased. This is a dangerous leap in a time when layoffs are announced in the headlines daily and job security is so precarious. Besides, one of the reasons that the market is in the state that it is in is because consumers were biting off more of a mortgage than they could chew.

What’s more is that the plan is still in the discussion phase and may not be made final before the current administration’s term ends. This would mean that action would not be taken until Congress reconvenes next year. As such, the general consensus is that buyers who have their eyes set on a new home would be foolish to let it slip through their fingers for a rate that may never come. And 4.5 percent may indeed be too good to be true.

“I would love to see it get that low, but I am cautiously optimistic,” Leslie Wilder of McEnearney Associates told UrbanTurf. “I have a hard time seeing it happen.”


  1. JT said at 4:09 pm on Wednesday December 17, 2008:

    If this happens I hope they aren’t so foolish to only offer the lower rate on new purchases.  In theory this would help reduce inventory, but in a way it also provides an incentive for owners whose rates are higher or possibly resetting to a higher rate to sell their current home in order to buy another home at the reduced rate.  This would have the adverse effect of putting more homes on the market.  If such a plan were to proceed it should be for both purchases and refinances (normal guidelines required in each).  Such a policy would also largely mitigate the “wait for the lower rate” attitude that is potentially slowing the market down right now.

  1. bill fletcher said at 11:47 pm on Wednesday December 17, 2008:

    I agree that folks “biting off more than they can chew” have prompted much of the current financial mess. I disagree that this is likely to be a problem with any new 4.5% program introduced through Fannie Mae or Freddie Mac at this time.  Underwriting guidelines have swung quite far away from the virtually non existent qualifying criteria of a few years ago. 

    Fannie and Freddie actually remained quite conservative compared to the loans that really got us in trouble.  If Fannie and Freddy ended up owning a significant number of sub prime loans I would be willing to bet that they bought them under some sort of political duress.

    I believe it was investment bankers like Bear Stearns who learned how to securitize loans and gradually gutted qualifying criteria down to nothing.  I am sure at the peak; these firms had so much money flowing in to be turned into loans that they needed to reduce qualifying guidelines just to create borrowers enough to absorb it all.  All the while Fannie and Freddie guidelines remained quite sound. 

    As of today, the underwriting pendulum has swung so far the other way that most homeowners who are comfortably making their current payments would probably have a hard time qualifying for a new Fannie Mae loan even if it carried a lower payment.

  1. JohnD said at 1:28 pm on Thursday December 18, 2008:

    Wake up everyone, some lenders are already offering 4.5%!  Totally disagree with JT’s comment about homeowners wanting to sell their homes to cash in on the lower rate.  Are you kidding me?  The big “IF” is whether or not they can sell their existing house in this market without taking a loss.  If they are lucky enough to sell at a reasonable price, I’m not sure many of them would want to immediatly puchase an asset that may continue to drop in value… especially in the short-term.

  1. Paul Gornall said at 5:08 pm on Thursday December 18, 2008:

    I don’t think the media is did a disservice as David Getson mentions.  The Treasury should have not mentioned it - they did the disservice.  We have buyers in our marketplace that are now waiting for the lower rate.  Our rates are holding steady at 5%.  It’s my understanding that when it happens there will be a pool on money and when it’s gone, up go the rates.  So, the buyers that wait might not gain.  http://www.ErieRealEstateBlogs.com

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