How Does a 4 Percent Mortgage Rate Sound?

TV finance gurus suggest 4 percent mortgages for all but experts doubtful.

February 27, 2009, 4:45 PM

March 3, 2009 — -- Here's a thought: What if America tried to steer itself out of its economic mess by reducing the interest on every new mortgage to 4 percent? And what if the country did this not just for people under water or facing foreclosure, but for absolutely anyone?

Would you go for a 40-year mortgage at a fixed 4 percent rate? Some high-profile television money personalities -- Jim Cramer and Suze Orman -- have been talking it up and generating a popular response.

"My thoughts were and are that if interest rates could come down to about 4 percent across the board -- for everyone -- that could start to stimulate the real estate market," Orman said in an e-mail to ABC News. "For many, it may mean that they can keep their homes."

Four percent interest, eh? Right now -- if you qualify -- you can, on average, get a 30-year mortgage at a fixed rate of about 5.3 percent.

That means you would have a monthly payment of about $1,110, on a $200,000 loan.

If you could get a 40-year mortgage at 4 percent, the monthly payment would be about $836. Both figures leave out property taxes, insurance and other possible fees.

Cramer, on his "Mad Money" show on CNBC last week, said the reduced payments could make a big difference for many homeowners.

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"The government gets in and guarantees mortgages for 18 months," he said. "Anybody who wants to refinance or buy, gets a 4 percent, 40-year mortgage. We'll get out of this mess -- like that."

Millions of Americans are clearly eager to stay out of foreclosure -- so much so that trying in the word "avoid" on Google will show that the most common search starting that way is "avoid foreclosure."

So when a possible way to do so comes from some popular figures, it strikes a chord. Various financial bloggers have grabbed on to the idea (with a few claiming they came up with it first).

Whether it is even remotely realistic is another question.

"It would be wonderful for all the borrowers, but I wonder where the lenders are going to get the money," said Stuart Hoffman, senior vice president and chief economist at PNC, a giant Pittsburgh-based bank and financial services company. "Who would be writing these mortgages? Is it the government going in and rewriting every mortgage? Or is it private lenders?"

Don't Count on 4 Percent Mortgages

It is important to remember that a mortgage is not a simple loan made directly to you by your bank or mortgage company. They typically bring in money from investors hoping to make a profit from the loan. And if investors stand to make less from mortgages with artificially low rates, Hoffman said, they'll find other places to put their money.

"It's a great idea but who's going to do it?" he said.

Jay Brinkmann, the chief economist for the Mortgage Bankers Association in Washington, was similarly doubtful.

"It's not clear how this would affect the foreclosure problem, because so much of what we have is a jobs problem," he said. "If the interest rate were zero, you would still have plenty of people who couldn't pay it, because they don't have the money right now to pay anything."

Brinkmann said he did not think a mortgage makeover alone would revive the economy and get consumers to spend money again. That, he reminded us, is a psychological issue -- the so-called wealth effect.

"If people feel rich, they tend to spend more," he said. "If people spend more, which they do when the value of their 401(k)s and the perceived value of their houses go down, they tend to save."

"So how do you get people to feel more confident? You do it more by strengthening the fundamentals of the economy."

Orman, for one, does not suggest that low-interest mortgages alone would revive the economy.

"I still think we need to see interest rates lower than 5 percent -- and I still think we have to fix the problem for people who are seriously underwater in their homes," she said by e-mail. "So if all the loans do not reset across the board, we will still have housing problems -- but at least we have a start."