Will Y2K Raise Your Mortgage Rates?

Peter G. Miller
OurBroker®

Like the hula hoop and pet rocks, fads come and go, including -- we hope -- all the end-of-the-world visions associated with the Y2K computer glitch. Alas, and doesn't it figure, the latest Y2K victim may well be mortgage rates.

The Washington Post and New York Times report that loan rates worldwide are rising in part because corporations are now borrowing more than usual so they will have cash in case there's a run on the banks at the end of the year. (See in the Post, "Rates Rise With Y2K Awareness," Sept. 2, 1999, and in the Times, "Facing 2000, Companies Stock Up on Money," Sept. 5th)

If big companies are now borrowing more just to be on the safe side, then there is less cash available for other purposes, and so those worried about a lack of legal tender around New Year's Day are right. In effect, worries about a Y2K cash shortage are being translated into a self-fulfilling prophesy -- and also into higher mortgage rates because fewer dollars are available for mortgage products.

In fact, excess company borrowing is real and it is a potential -- if short term -- problem. The Federal Reserve Bank of New York, for example, lends money overnight to banks -- loans which are secured with U.S. Treasury securities. By lending cash, or withholding cash, the Fed can impact overnight interest rates.

For the coming New Year, however, the N.Y. Fed is going all-out, offering to provide cash in exchange for not only paper from the U.S. Treasury, but also other forms of collateral such as mortgage-backed securities issued by Fannie Mae and Freddie Mac.

By making more cash available, the N.Y. Fed hopes to hold down rates that might otherwise rise as a result of Y2K-inspired company borrowing.

The Y2K rate surge is not a problem if you now have a fixed-rate mortgage, but for the millions of people with ARMs that will adjust in the next few months, and for those in the buying mode, Y2K may mean facing a brief interest-rate bulge.

What to do?

If we're really seeing a Y2K interest rise, then figure it's temporary. By the first week of January, when the terrors of Y2K will have hopefully passed and the world has not come to an end, it follows that interest rates should begin to decline as companies and countries once again begin putting their excess cash into bonds and notes.

What to do if you're a borrower or home buyer?

Let's agree that no one can predict future loan rates -- just consider the efforts of seers, soothsayers, and economists. And let's also agree that I too haven't the foggiest knowledge of where rates may head or not head. That said, if rates go up because of Y2K concerns, here are strategies to consider if you're looking for mortgage money.

If you have a fixed-rate loan you don't have a problem. Sit back and enjoy the New Year.

If you have an ARM that adjusts in the next few months, Y2K may cause a marginal rate bump. Should this happen, consider that it's cheaper to pay a few dollars more in deductible interest than to refinance.

If you're refinancing, it may pay to wait. Or, you may want to look at an ARM or a phased mortgage, something with one rate for an introductory period and then a fixed rate or one-year adjustable for the rest of the 30-year term.

Be sure to visit with online lenders and watch the mortgage marketplace.

In the end, of course, loan rates change all the time and for any number of reasons. Y2K worries are just one consideration among the many factors which impact interest levels. But the good news about Y2K concerns is that at least we won't be worrying about them six months from now.

Question Of The Week

Q Are there government sites online which can help me find past sale prices?

A Real estate sites generally relate to properties currently available for sale rather than properties which have already been sold. However, past sale information is likely to become more common on the Internet as local governments place property records online.

As a place to start, call the local property records office which tracks area sales. Ask if they have an online site. If yes, great. If no, ask about visiting their facility. Most will help you find the data you need.

A non-government choice works like this: Local real estate brokers closely track sale activity and likely have the data you want.

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