Tonight it's time for me to predict the future. In Ben Bernanke's latest remarks, the fed chair indicated that on June 30, 2011, the Federal Reserve will stop buying all these mortgages. What does this mean? When you go to get a mortgage, the mortgage is sold by the bank to the secondary market where it is securitized and sold to investors. The federal government has been buying a ton of this paper, the amounts are in the billions and trillions. On June 30, they will stop buying all this paper and regular investors are going to have to fill in the gap of 50% of the mortgage market.
So mortgage rates will go much higher because investors who invest in mortgages like your home mortgage aren't going to be content with a 4%-5% return, especially not with the raging inflation we're seeing right now (have you been to the pump lately?). I paid $4 for a gallon of milk the other day...come on man.
So how high are they going to go? I'm pretty bullish on mortgage rates skyrocketing (I don't want them to one bit of course). But I see rates going up drastically! Maybe 2-3% by the end of 2011. I think we are eventually headed to a situation that the US was in during the early 80's. This means interest rates of 20%+!
What does this mean for you? If you have an ARM, you are toast. Refinance NOW to a fixed rate. Adjustable rate mortgages shift ALL the risk of rising rates from the bank to you; and all for what? 0.5% less on your rate? This is negated the moment the rates rise and we know they will. When all the bailout money trickles down and the inflation starts being felt on the streets, the Fed will only be able to raise rates to fight inflation. It's their only tool left. Plus, even if your ARM has a ceiling, as soon as you hit your 3, 5, or 7 year balloon, what will you do? What's your plan then? Refinance? Probably not since rates will be 10%+. Sell? Do you want to be forced to sell? Foreclosure? Not fun.
What if you already have a fixed rate mortgage? Great. Stick with it. Now would be a good time to borrow money to buy rental properties as well. For every mortgage in your portfolio at 4.5% - 6%, when inflation hits, your assets will skyrocket in value (not price) and as rents appreciate, your fixed rate mortgage and payment will stay the same.
Let me know your thoughts...