The Hangover Is Going to Hurt

Today I was reading in an article from Time.com, “The Bank Bailout’s Side Effect...” that one of the side effects of The Bailout is a rise of mortgage costs. By that the author means that interest rates on mortgages are increasing. One can ask what are interest rates representing? What are mortgage costs? This is relevant because I believe that it address a fundamental issue that nobody really discuss what should be the cost of borrowing? Or how to determine what interest rate we should be paying to borrow money?

The first confusion when talking about mortgage costs, is fees, points etc.. vs interest rate. Most news media and common borrowers do not understand that there is a significant difference between these two “costs”. One is the cost of producing the loan (fees, points etc..) the other represent the risk taken in combination with the availability of capital. If we look at capital as a product the more capital there is available, the less expensive it should be. The less capital available for borrower, or bank or anybody the more it will cost to borrow.

Nothing is free!! Well until recently most of the world was looking to get money for free. This was especially true in the United States were the real cost of borrowing was never completely factored or presented into loans that were funded. Numerous lenders were promoting, no interest credit card, free home loans, etc… which was never true. Today after a party that lasted 7 years borrowers are waking up to the real cost of money/capital/funds. The hangover is going to hurt.

Hard Money lenders know this to well, money is not free. If you really want to know what real loan costs are, ask a Hard Money lender. Within minutes they will be able to tell you both the loan cost and risk levels.