Rates steady as markets ponder impact of trade war;
Interest only loans worth a look for many home buyers
In the absence of major economic news this week (a strong retail sales report was the only major report), rates moved in a narrow range, with the 10 year Treasury yield ending the week just under 2.9% after moving between 2.8 and 2.9% all week. Fed Chief Powell testified before Congress this week and indicated that he was not unduly concerned about the economic effects of a trade war while emphasizing that trade wars are never good for the global economy. While tariffs may hurt sales of US goods abroad and make imported goods more expensive for US consumers the primary driver of relative prices may turn out to be exchange rates: the dollar has been very strong against most foreign currencies in recent weeks. This mitigates the effects of tariffs on imports and magnifies the effect of tariffs imposed by our trading partners. The overall effect could be to keep inflation moderate here while hurting the industries that depend heavily on sales abroad.
Another driver of long-term interest rates and inflation will be the budget deficit. Trump tax cuts have ballooned the Federal budget deficit. It is too soon to tell what effect this will have on inflation. While previous administrations were sharply criticized for running large budget deficits because of the potential inflationary impact, we continued to experience moderate inflation during that entire period, with the supposed disastrous inflation consequences never realized.
Interest only loan products were very popular during the sub-prime boom in the early 2000s with both sub-prime and well-qualified borrowers. Many observers asserted that the interest only feature (along with stated income loans) exacerbated the market’s decline. Interest only loans are less widely available than they were at that time, and are used mainly for higher-priced properties. This is partially because the mortgage agencies FHA, Fannie Mae and Freddie Mac do not offer loans with the interest only feature, as they did in the subprime era. For jumbo loan borrowers, particularly younger ones, interest only loans have a bad reputation because of the subprime era experience.
We arrange interest only loans on a regular basis for borrowers who appreciate the flexibility offered by these products. For example:
Ability to time principal payments to coincide with cash inflows from bonuses, stock awards and other cash infusions
When buying a home before selling, ability to make a large principal reduction after the sale of the original home and see immediate recalculation of mortgage payment (this is also widely available with amortizing loans)
When expecting an increase in income, making more affordable interest only payments in the early years of the loan term and then making larger payments when income is higher
When interest only loans were first introduced, the borrower was qualified based on the minimum required payment. That is no longer true: interest only loans qualify at higher rates than for amortizing loans. So, no one gets an interest only loan because they don’t qualify for an amortizing loan, as often happened in the subprime era. This loan product is a great option for the right home buyer!