Still the Time to Borrow and Buy

November 20, 2009 · Dean Rizzi

For the past four months, we have been forwarding the argument that housing prices have stabilized. Wells Fargo has provided another arrow for our quiver. To avoid defaults and foreclosures, the banking giant is offering homeowners with Alt-A ARMs the option to offset monthly payment increases with interest-only loans to defer amortization for six to 10 years.

It sounds like a risky move. After all, interest-only loans were a contributing factor to the housing meltdown. But many of those loans were originated in a much riskier era – near a market top. That is certainly not the case today, which is why Wells Fargo is betting that home prices have stabilized and that the economy will improve. We think it is a smart move.

We also think it is a smart move to refinance or buy today. Rates are very, very good (but they will not be forever, for sundry reasons we have previously stated). What’s more, the purse strings aren’t nearly as tight as borrowers might think. According to the Federal Reserve, the rate of banks that reported tightening lending standards for prime residential real estate loans was 25% in October, which is well off the peak of 75% reported in July 2008.

In other words, 30-year fixed-rate mortgages are readily available at 5% (which for borrowers in the 28% federal income tax bracket works out to 3.6% after tax). Meanwhile, the 5/1 hybrid ARM presents an intriguing option for borrowers planning to move within the next few years. A 3.75% 5/1 works out to a mere 2.7% after tax for someone in the 28% tax bracket. Yes, rates could go lower, but not much lower.

www.deanrizzi.com

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Tags: Dean Rizzi, home loans, mortgage, real estate bottom, tightening lending standards

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One Response to “Still the Time to Borrow and Buy”

Brian Boisson on November 23rd, 2009 9:55 am

Dean,

Thanks for the interesting news about Wells.

I too think that they would not put themselves in a poor position if they felt prices were going to fall.

Good news for the homeowners who can benefit too!

Brian Boisson

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