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With the economy in its current state (i.e. horrific), interest rates on loans are very low right now. I have heard people say that right now is a 'good' time to take out a loan, and that it is a buyer's market in real estate. Recently, I talked to somebody who decided to buy a house. The conversation was short, but the quick reason he gave was that the interest rate on the mortgage was so low it didn't make sense not to buy. I understand the benefit of such low interest rates over a period of time, but I can't help but feel that these low rates are somehow a gimmick to trick people into taking out loans.

My question is the one in the title. But more specifically, are there any hidden details that come with taking a loan out when interest rates are low that I should be aware of? (Besides the obvious of then having more debt!)

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What country are you in? This would help frame the answers appropriately. Questions on the state of the economy, interest rates, real estate valuations, etc. will vary depending on where you are. –  Chris W. Rea Feb 7 '12 at 22:21
    
I am in the United States –  Eric Feb 7 '12 at 23:14
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7 Answers

up vote 8 down vote accepted

but I can't help but feel that these low rates are somehow a gimmick to trick people into taking out loans

Let me help you: it's not a feeling. That's exactly what it is.

Since the economy is down, people don't want to jeopardize what they have, and keep the cash in their wallets. But, while keeping the money safe in the pocket, it makes the economy even worse. So in order to make people spend some money, the rates go down so that the cost of money is lower. It also means that the inflation will be on the rise, which is again a reason not to keep money uninvested.

So yes, the rates are now very low, and the housing market is a buyers' market, so it does make sense to take out a loan at this time (provided of course that you can actually repay it over time, and don't take loans you can't handle).

Of course, you shouldn't be taking loans just because the rates are low. But if you were already planning on purchasing a house - now would be a good time to go on with that.

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I feel like I understand well enough why interest rates are low; the government wants the economy stimulated. One of the ways they try to help that is to tell banks to lower interest rates in hopes that people will spring for a loan. But my guess is that banks don't like this. So maybe banks say 'Sure, we'll lower interest rates. But in the fine print we're gonna put clauses X, Y and Z to make sure we still profit nicely from these loans.' –  Eric Feb 7 '12 at 23:21
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@Eric, banks profit from loans. their margin is 4-6% at least over the rate they pay to the Federal Reserve, regardless of the Fed rate. The Fed rate now is 0%, so all the interest you pay goes directly to the banks. Don't you worry about them. Note that the "conforming" loans are regulated and the rates there are set by the government through the Fanny Mae and Freddy Mac banks, but unsecured/non-conforming loans are by and for the banks. That's what banks do, I wonder why you sound like you think that its something bad. –  littleadv Feb 7 '12 at 23:27
    
@littleadv: Ah, I see. I was confused a little bit. I forgot that the government loans monay to banks, and the banks then loan it to people. So the profit that banks make is not as devastated as I was thinking it would be. And I didn't know about conforming vs. nonconforming loans. That also cleared some things up. Thanks. –  Eric Feb 8 '12 at 0:05
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Yeah, low rates may be a "gimmick" but it's a gimmick being run by the Federal Reserve. The rates and mortgages and the like you are actually offered are, in fact, legitimate, and there is not much reason to expect more or fewer "gotchas" in the paperwork. –  fennec Feb 8 '12 at 21:39
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The logic "the interest rate on the mortgage was so low it didn't make sense not to buy" is one reason the housing bubble happened. The logic was that it made the house affordable even at high prices. Once the prices collapsed people still had affordable payments, but were unable to sell because they were upside down on the mortgage.

If you can refinance to a 15-year mortgage, or from a adjustable mortgage to a fixed rate mortgage. it can make sense. You can save on the monthly payment, and on the total cost of the mortgage.

But don't buy to take advantage of rates; or to save on taxes; or to build a guaranteed equity. These can be false economies or things that can't be gaurenteed.

Of course if nobody spends money, the economy will stay poor.

As to hidden details. Only purchase housing you want to own for the long haul. If you expect to flip it in a few years, you might not be able to. You might end up stuck as a long distance landlord.

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The bubble was a combination of (a) teaser rates on option ARMs which were like financial time bombs, (b) liar loans in which the rules of good mortgage underwriting (20% down, 28/36 ratios) went out the window, (C) people at rating agencies who decided that if one pools enough junk loans into one bond, it's magically AAA, and (D) Credit default swaps which encouraged these bad loans, and when they collapsed a number of people walked away with billions of dollars. –  JoeTaxpayer Feb 8 '12 at 1:39
    
@JoeTaxpayer, that is why I said one reason –  mhoran_psprep Feb 8 '12 at 3:01
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Yes, it's a buyer's market. If one is looking to buy a house, comparing the cost to rent vs own is a start. Buying a property to rent to a stranger is a different issue altogether, it's a business like any other, it takes time and has risk.

If today, one has a decent downpayment (20%) and plans to stay in the house for some time, buying may make economic sense. But it's never a no-brainer. One needs to understand that housing can go down as well as up, and also understand all the expenses of owning which aren't so obvious. Ever increasing property tax, repairs, etc.

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I think it's smart. It's the same game, just stiffer regulations, so your lender will ask more from you.

Buy if you...

  • could find some type of employment if you lost your job
  • can pass the stiffer lending rules(your rate will be higher if you don't have perfect credit)
  • don't think the home prices in the area will fall much more
  • your rent is equal to or greater than the mortgage payment(consider utilities, etc)
  • can put 20% down (so you don't have to pay PMI)

If someone has been saving for years and years and still can't put 20% down, I think they're taking a significant risk. Buy something where your mortgage payment is around one week's salary at most. Try to buy only what you can afford to live in if you lost your job and couldn't find work for 3-6 months. You might want to do a 30-yr fixed instead of a 15-yr if you're worried about cash-flow.

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Are things getting better yet or are things still a mess?

I have heard people say that right now is a 'good' time to take out a loan, and that it is a buyer's market in real estate.

Something to consider here is what intentions do you have for the real estate you'd buy. If you intend to sell quickly, then selling into a buyer's market doesn't sound like a great idea. While real estate may be cheap, there can be the question of how long do you think this will last? How much of a burden on time and energy are you expecting to take if you do switch residences or buy an investment property?

But more specifically, are there any hidden details that come with taking a loan out when interest rates are low that I should be aware of?

I'd be careful to note if the rate is fixed for the entire length of the loan or does it adjust over time. If it can adjust then there is the possibility of those adjustments going up.

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You are not "the economy". The economy is just the aggregate of what is going on with everyone else. You should make the decision based on your own situation now and projected into the future as best you can.

Loan rates ARE at historical lows, so it is a great time to take a loan if you actually need one for some reason. However, I wouldn't go looking for a loan just because the rates are low for the same reason it doesn't make sense to buy maternity clothes if you are a single guy just because they are on sale.

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so this is a loan for a house? a loan on a house? a new mortgage? you shouldn't just get a loan for the hell of it any time.

interests rates are low because the yields on US treasuries have been pushed closer to zero, and thats pretty much that.

the risk is on the bank that approves the loan, and not you. (your ability to repay should be truthful, but your payments are smaller because the interest is so low)

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My curiosity on interest rates is not centered on a particular loan, but more about the general setup. I do have a question about a specific loan, but I am going to ask it separately to avoid conveying the message that I'm considering taking out that loan just because the interest rates are low. –  Eric Feb 7 '12 at 23:25
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protected by Chris W. Rea Jan 21 '13 at 13:58

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