Fed cuts key interest rates by 0.75%
Posted by admin in Uncategorized on June 10th, 2010
In response to an economy that is heading for a recession, the Federal Reserve Board (Fed) chose to cut the Discount and Federal Funds Rate by 0.75% this morning before the market opened. It was a surprise move due to the fact that yesterday, while the U.S. markets were closed for Martin Luther King, Jr. Day, most other major stock markets across the world plunged at the prospect of a weaker US economy.
Does this mean that mortgage rates fell by 0.75%?
No. These rates are overnight rates that don’t directly affect the mortgage interest rates. The Federal Funds Rate is the rate at which banks lend money to each other. The Discount Rate is the rate charged to banks that borrow money from the Central Bank. These rates are changed by the Fed in order to control the money supply and, thereby, influence the economy.
They are important, though, because they signal the direction of overall interest rates in the economy. Mortgage interest rates are determined by the rates offered on mortgage-backed securities (MBS) which are similar to bonds. The MBS’s generally move in the same direction as the ten-year bonds over the long run. So, when the Fed acts to lower rates, the overall trend for all interest rates is lower.
Before today’s action by the Fed, the markets were already anticipating a cut in rates of 0.5% and rates had already come down. Mortgage interest rates did head a little lower today and are approaching the all-time lows set during the refinance boom a few years ago.
Should I refinance now, or wait for rates to get even lower?
This is always the $64,000 question. If you can save money now, I always recommend doing it. If rates continue to fall, you can always refinance again.
When the Fed cuts rates, it is good for business. When business is good, people buy stocks hoping that the price will go up. When people buy stock, and the stock market goes up, money flows out of bonds and rates go up. In fact, many times when the Fed cuts rates, interest rates actually increase in the short term.
Today, the Dow Jones Industrial Average (Dow) opened almost 500 points lower. Because of the surprise rate cut by the Fed, the market rebounded and finished down about 128 points.
What should I do?
Contact me today to see how much you can save on your refinance, and to make sure a refinance makes sense for you. As I discussed in a previous article, “How much will my credit score cost me on my next mortgage?”, rates are determined by your credit score and LTV, as well as the market.
Are Mortgage Rates Going to Go Down in September?
Posted by admin in Uncategorized on June 10th, 2010
This is the biggest question I get, and the hardest to answer. Nobody knows for certain the direction of interest rates, but here is some thing to consider when deciding whether or not to refinance your mortgage or lock in your interest rates.
Now – Mortgage Rates Are in a Tight Range
Mortgage interest rates have been in a range between 5.0% and 5.5% for most of this year. Historically, these interest rates are incredibly low. The US government has done everything they can to keep these rates as low as possible. The Fed has been aggressively purchasing Treasuries and Mortgage-Backed Securities (MBS) – as the Fed purchases these securities the demand for them increases, as does the price, which causes the yields to decrease. It seems that every time mortgage rates approach 5.5%., the government has some announcement about purchasing treasuries and MBS in order to increase demand and push the rates back down.
Anybody who is at or above 5.5% should at least take a look at refinancing to see how much money they can save. And, if you have equity in your home and carry balances on your credit cards you would be crazy not to consider paying that off to save lots of money. Now is ALSO the time to consider shortening the term of your mortgage.
Many Projecting Lower Rates over the Short Term
There are countless experts, journalists and bloggers who are predicting lower rates over the next 30 days. They point to the recent decrease of mortgage rates and increase of demand for treasuries and MBS. They also look at the rapid increase in the stock markets (The Dow closed at 9,582 on 8/28/09 up from 6,595 on 3/6/2009) and many predict a market correction (A market correction is when the stock market, while on an upward trend, goes down by 10 – 20%. Many people see this as a normal part of the stock market and feel that a correction is likely soon). If there is a market correction, the money that comes out of stocks will be put into safer investment vehicles such as treasuries and MBS – again, increasing demand and prices and decreasing rates.
If this is the case, you need to be prepared to take advantage of these rates as these interest rate drops are historically short-lived. There are a lot of people who missed out on locking their mortgage rates below 5.0% earlier this year because it lasted for such a short period of time and they were not prepared.
If you think rates are likely to decrease, give me a call and we can get the application process started. If rates do drop, we will have all of the information we need to jump on these rates as soon as they fall. If the rates drop and go up as quickly as before, the only people who will be able to take advantage of them are those with applications in process.
Later – Rates Have Only One Way to Go
Eventually, though, rates will have to increase. There is not a lot of room on the “down side” on rates. And, with the positive housing and economic news we have had lately, the government will likely reduce the amount of treasuries and MBS they purchase. With the government reducing their purchases, the demand goes down, causing prices to go down and rates to rise. Many experts are predicting the government to make an announcement at the end of September to this effect. Once that happens, rates will rise.
What should I do?
First, call me and get your application done so you ARE ready the minute rates come down and you can benefit. Then, we can talk about your situation and see what the best plan is for you. If rates come down, we will be ready to take advantage of them. If rates don’t come down, we will be ready to lock at the current low rates before rates begin to rise. Either way, the best protection you have is to have an application in process so you are ready to take advantage of the market – no matter what the market does.
For more info, any questions, or to help you get your application started today, I can be reached on my cell phone at 708.473.7688 or via e-mail at BarkerLoans@gmail.com.
