Your interest rate on Mortgage Refinance

Mortgage refinance interest rate is rising. But first we need to understand the connection between recent subprime mortgage crisis and rise in mortgage refinance interest rates. Housing prices have been on the rise during the last decade in the United States. These rising housing values tempted new buyers to borrow beyond what was safe for them and existing home owners to refinance their existing mortgage loans using as collateral, the increased value of their real estate. In the case of loans made to poor credit customers known as subprime loans, the lenders were also less cautious as the housing prices were on the rise. Lenders knew that housing prices would not increase forever but kept on lending with the belief that the housing price peak will occur very far in the future.

Some home owners used the growing equity in their homes as a way to live beyond their means. They would build up credit card debt, then consolidate the debt into their mortgage through a cash-out refinance. The consolidation, by extending the term of the credit card debt, reducing the rate and making the interest tax-deductible, would reduce the borrower's total monthly payment. They could then start building up their credit card debt all over again. But this could only continue as long as the housing prices appreciated. Property values in most areas stopped rising in 2006 and in many areas they have since declined.

Subprime Mortgage Crisis

Subprime mortgage crisis began when the housing price depreciation started Now this is the law of the market supply and demand that a increase in price will cause the supply to increase until a point comes when it outstrips the demand. At that point the price starts to decline. This is exactly what happened in housing markets. Many customers made purchase and refinance decisions based on the expectation that their houses would appreciate like that in the past. As soon as appreciation stopped, they were stuck with total debt service costs that was unmanageable alongwith negative equity in their house. While it wasn't only subprime borrowers who fell into this trap, these borrowers had the least capacity to extricate themselves.

Many factors created the subprime mortgage crisis, but the most immediate causes were a rising interest rate and declining property values which caused people with adjustable rate mortgages to see significant increases in their loan payments. This left many borrowers unable or unwilling to meet their financial commitments. This caused a sharp rise in home foreclosures. The sharp rise in foreclosures after the fall in housing values caused several major subprime mortgage lenders to shut down or file for bankruptcy. This activity has helped lead to the stock price collapse of some large lenders like Citigroup, a blue chip company that is included in Dow Jones Industrial Average. This crisis can result in global recession as it has started to cause liquidity crunch in the global markets.

Interest Rate Freeze

US President George Bush has unveiled a wide ranging mortgage relief package. He said interest rate freezes and refinancings agreed by lenders could help 1.2 million distressed home-owners. The plan, devised by US Treasury officials with major lenders and investors, would help homeowners, refinance subprime mortgages with adjustable rates or freeze the current interest rates for five years. The programme comes amid fears that a rising tide of mortgage defaults could displace as many as two million homeowners and have a wider economic impact. One should wait for the passage of this act to take advantage of the mortgage refinance interest rate freeze.