Interest Rates!

Well it finally looks as though the Government is trying to help us, the homeowners. Recently they injected 800 billion into the market specifically in mortgage backed securities and other similar investments aimed at improving interest rates and getting the economy jumpstarted.

Here is the article if you would like to read about what is going on:
http://online.wsj.com/article/SB122765938507058417-email.html


Interest rates have definitely improved since they have done that and so here is a snapshot of where they are now:

30 year Fixed: 5.375%
15 year Fixed: 5.125%

If you have a higher rate, but aren’t sure it is worth it to refinance than you can give me a call or go to http://workharding.com/loancenter-calculators-interestsaving.aspx where you will find a helpful calculator that can determine if it is worth it to refinance or not.

We don’t know how long interest rates will stay low, so let’s get started on your refinance or purchase now!

The Federal Reserve and 30 year mortgage rates

The Federal Reserve is expected to lower the Fed Funds Rate Tuesday and that should cause mortgage rates to move higher.

This is a counter-intuitive relationship for most people because when they hear that the Fed is "lowering rates", they instinctively think it means "mortgage rates".

That's not the case at all; the Fed Funds Rate has very little to do with mortgage rates.

If the Fed Funds Rate and mortgage rates were truly related, the chart shown here wouldn't diverge towards the right -- all three lines would move in tandem.

And they don't.

The Fed Funds Rate is an interest rate usually reserved for loans from one bank to another, beginning at the close of the business day and repaid the following morning before the start of the next business day.

This is why the Fed Funds Rate is often called an "overnight rate" -- the money is literally borrowed overnight.

By contrast, mortgage money is typically borrowed over 30 years. This is 10,957 overnight rates strung together and is a completely different risk class altogether.

Fed Funds Rate cuts make mortgage rates go up the cuts aim to spur economic growth and economic growth can eventually lead to inflation -- the enemy of mortgage rates.

When inflation is present, mortgage rates tend to rise so the more inflation there is, the more mortgage rates will jump over time.

Now, for the Fed to simultaneously cut the Fed Funds Rate and guide mortgage rates lower, it would have to gently stimulate the economy and not over-stimulate the economy.

That's a huge challenge because Fed Funds Rate stimulus takes up to 12 months to work through the economy and during that year, the Fed would meet eight more times.

So, at one meeting, the Fed would cut the Fed Funds Rate and then use the seven remaining meetings to see how it all turns out.

The Fed doesn't act like that, however, and explicitly said it doesn't care about long-term inflation risks right now. The major concern is the short-term and to lessen those risks, additional rates cut are in order.

Therefore, markets are now inferring that the Fed will drop the Fed Funds Rate as far as it has to in order to stop a U.S. recession. Markets fear the Fool in the Shower scenario that is now looking inevitable -- economic over-stimulation and long-term, runaway inflation.

It's a terrible outcome for mortgage markets and why cuts to the Fed Funds Rate this week should cause mortgage rates to rise.

ARM vs. Fixed

The spread between fixed rate products and ARM's continues to widen.

About 2 months ago the difference between the two was very small and so it was almost always better to just go with the 30 year fixed. Now that has changed...

First off, what is an ARM? An adjustable rate mortgage or ARM is a mortgage product that is fixed for a certain period of time (1, 3, 5, 7, 10 years). They typically offer a lower interest rate than 30 year fixeds (especially now). They are also still amortized over a period of 30 years.

These get a bad rep in the media and by loan officers sometimes. It seems it is the same loan officers that 3 years ago said finance into a low 3 year ARM. They are now saying get out of that ARM and finance into a 30 year fixed. Whatever they can do to get more business...

Anyhow ARMs are good if you know you are only going to be in a house for a short period of time. If you are thinking say 4 years max than get a 5 year ARM and you will then end up paying a lot less in interest over the time you have your mortgage. You don't need that rate fixed for 30 years because you won't be there for 30 years.

If you are not sure what your future holds get a 30 year fixed, it is safer, but that security comes at a price.