I know the WSJ prime rate is 5% this week…can anyone share their insight on what the prime rate will look like in 1-2 years.  I am trying to decide between 2 loans; one of which is 6.75% fixed and the other is prime plus 1% (both 3 year loans).

Tunnel - 14 August 2008 01:45 PM

I know the WSJ prime rate is 5% this week…can anyone share their insight on what the prime rate will look like in 1-2 years.  I am trying to decide between 2 loans; one of which is 6.75% fixed and the other is prime plus 1% (both 3 year loans).

If it is an amortizing loan, I would go with the lower rate because the Fed will not be moving rates anytime soon given that oil and commodity prices have come down from their peak.  There’s an outside chance that the Fed may even have to lower rates even more if the housing sitaution gets worse (assuming oil and commodity don’t go up significantly).

The Fed will start raising rates after the election.  Even though they don’t control mortgage rates, as inflation goes up rates will follow.  I see prime 2 points higher in Obama’s second year in office.

If they raise the rates they will head this country into a deep recession along with more unemployment and foreclosures. With the government taking over Fannie and Freddie i doubt they will raise it if anything they may drop it because the stock market is going to tank next week…

OCCOBRA - 06 September 2008 09:49 AM

If they raise the rates they will head this country into a deep recession along with more unemployment and foreclosures. With the government taking over Fannie and Freddie i doubt they will raise it if anything they may drop it because the stock market is going to tank next week…

You may be right because 2-year notes rates have decreased from over 3% to just under 2.20% which indicate that the FED will not be increasing rates anytime soon.

The world financial markets seem absolutely gorged with debt, especially with the coming Freddie Mac bailouts. I can’t see how rates for all types of debt woud not increase.

muzie - 06 September 2008 05:39 PM

The world financial markets seem absolutely gorged with debt, especially with the coming Freddie Mac bailouts. I can’t see how rates for all types of debt woud not increase.

Premium risk spreads have increased for almost every type of debt due to the credit crunch not the underlying risk-free debt indexs (i.e. US treasuries notes and bonds).

But, aren’t treasuries the safest investment?

treasury credit default swap spreads

muzie - 06 September 2008 05:39 PM

The world financial markets seem absolutely gorged with debt, especially with the coming Freddie Mac bailouts. I can’t see how rates for all types of debt woud not increase.

Please explain why rates would increase if the world economy is slowing down which is pushing commodity prices for food, oil, and gold down resulting in lower inflation???  If anything, if the slowdown intensified then the rates worldwide will be coming down.  Last I checked 2-year notes are down from 3.00% back in July to about 2.25% and the 10-year rates are down from over 4% to about 3.6% today and most likely heading lower.

usctrojanman29 - 09 September 2008 07:59 AM

muzie - 06 September 2008 05:39 PM

The world financial markets seem absolutely gorged with debt, especially with the coming Freddie Mac bailouts. I can’t see how rates for all types of debt woud not increase.

Please explain why rates would increase if the world economy is slowing down which is pushing commodity prices for food, oil, and gold down resulting in lower inflation???  If anything, if the slowdown intensified then the rates worldwide will be coming down.  Last I checked 2-year notes are down from 3.00% back in July to about 2.25% and the 10-year rates are down from over 4% to about 3.6% today and most likely heading lower.

Interest rates will go up because risk premiums are going up. Also, once the financial crisis has abated somewhat, the FED will raise rates. Interest rates have nowhere to go but up over the long term. Do you think lenders will start paying you to borrow money with negative interest rates?

IrvineRenter - 09 September 2008 09:47 AM

usctrojanman29 - 09 September 2008 07:59 AM

muzie - 06 September 2008 05:39 PM

The world financial markets seem absolutely gorged with debt, especially with the coming Freddie Mac bailouts. I can’t see how rates for all types of debt woud not increase.

Please explain why rates would increase if the world economy is slowing down which is pushing commodity prices for food, oil, and gold down resulting in lower inflation???  If anything, if the slowdown intensified then the rates worldwide will be coming down.  Last I checked 2-year notes are down from 3.00% back in July to about 2.25% and the 10-year rates are down from over 4% to about 3.6% today and most likely heading lower.

Interest rates will go up because risk premiums are going up. Also, once the financial crisis has abated somewhat, the FED will raise rates. Interest rates have nowhere to go but up over the long term. Do you think lenders will start paying you to borrow money with negative interest rates?

I agree that risk premiums have gone up and will probably continue to inch up in the near term.  My point was that I don’t see the FED increasing the Prime Rate for at least 12-18 months due not only to the financial crisis (which will takes years to be resolved) but also due to the slowing economy.  Actually, a situation where lenders pay you to borrow money already exists because you can go out and get a HELOC for Prime - 1.01% (3.99%) today and put your money into a CD that get’s 4.25-4.50% (the ones that are in trouble and offer high CD rates).  I work in banking and know many people who do as well as I’m seeing first hand how desperate the weak banks are for deposits.  Our bank has experienced an outflow of CD deposits the pasts 6-9 months due to other banks offering crazy CD rates while we don’t match because we are very well capitalized.  In the banking industry, we call CD money the “hot money” because it frequently moves to the bank that pays the best rates.