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Finally a journalist has something to intelligent say about Fed Rate Cuts

Posted on December 11, 2007 by Ray Williams (NMLS #216267).

Hey All,

I wanted you to read something I found online this morning while waiting to hear what the Fed will do today when they meet. What you want to do is read through the following article, as it may be the first time I have found article where a journalist actually educates the consumer on what to expect from a Fed Rate Cut.

There are a few points I would like to make to clarify some of the article:

1) The market has already priced in the change~ She is somewhat on track here but offbase. Truly the last week has been extremely volatile for mortgage rates, and actually they have gone up over the last week, from where they reached 3-year lows. Be wary when reading 30 year average rates, as by the time they are posted they are already a week outdated!

2) Gerri talks about ARM resets not being as severe~ What you need to understand is that your ARM is made up of an Index (variable) and a Margin (fixed). You add those together and you get the fully indexed rate. (Ex. Index = 6 month Libor = 5.38, Margin = 5.0, Fully Indexed Rate = 10.38) You also have what is called a CAP on your adjustment. If your current rate hasn’t adjusted yet, you are facing the initial adjustment. If it has already once (even if it didn’t but could have), you are facing the periodic adjustment. The initial adjustments range from 1-6%, and periodic adjustments range from 1-2% on average. Meaning if you are sitting at 6.375% and your loan is set to adjust for the first time and your initial adjustment cap is 5%, here is what you look at. If we use the earlier example of Index being 5.38% and Margin being 5%, then you could have a cap of 10.38 (which is rounded up to the next highest .125% or 10.5%) for the initial adjustment. So you would be looking at 10.5% for your new rate and payment based off of that example on a $250,000 loan would be principal & interest $2,286 from $1,559 at 6.375% where it started. This is the real deal on a rate adjusting on an adjustable mortgage the first time.

3) Truly she is right when she says to keep it in perspective~ Right now and for the most recent months mortgage rates have been driven by inflation and job growth. The reason inflation has a role requires an understanding of bonds (mortgages). Meaning if there is a worry on inflation then what you can buy today with a dollar may not buy you as much in the future, if inflation is higher.If you buy a note (mortgage bond) at 6% and inflation is a worry. That would mean that in the future your dollar wouldn’t necessarily be worth as much. If you have a note payable (due) in the future and your dollar isn’t going to be worth as much, you are going to want a higher rate when you buy it. So instead of wanting to buy it at 6% you may want 6.375% (to earn the rate of return you would like) to take into consideration the future value of that dollar with inflation.

Enjoy the article, and let me know if you have any questions about your adjustable rate mortgage. rwilliams@summit-mortgage.com

~Ray

What a rate cut means to homeowners

How to keep ahead of rates and lower them when your card issuer hikes them up.

See all CNNMoney.com RSS FEEDS (close)

By Gerri Willis, CNN

NEW YORK (CNNMoney.com) — Most analysts see the Fed cutting rates for the third consecutive time tomorrow. What investors don’t know is just how deep the Fed will cut. What will this mean for your mortgage? Here’s what you need to know.

1: Long-term mortgages won’t move much

Right now investors are split on whether the Fed will lower the funds rate by another quarter point to 4.25% or cut it by a half-point, to 4%. But the fact is, there’s not much doubt that the Fed will cut rates. And because of that, the market has already priced that in, says Mike Larson with moneyandmarkets.com. 30-year fixed rates have been falling for some time.

In July, the average rate on a 30-year fixed mortgage was 6.66%. Last week, it was 5.82%. So, a rate cut won’t really do very much to lower long-term rates. They’re already low. So if you want to refinance, it’s a good time to start shopping.

2: ARM resets not as severe

The Fed move tomorrow may be more significant to borrowers with adjustable-rate mortgages than what the government is doing in freezing subprime interest rates. That’s according to Greg McBride at bankrate.com. Most resets on adjustable rate mortgages will reset in the middle of next year. And the fact that the Fed is cutting rates, will make these resets more manageable for prime borrowers, which aren’t covered by the foreclosure-prevention plan announced last week.

So, if you had an adjustable rate mortgage that started at 4.5% and your rate was going to reset at 7.5%, you may only face a rate reset of 5.7%.

3: HELOCS will be cheaper

Home equity lines of credit will be cheaper if the Fed does cut rates. It may take up to three billing cycles to see the actual decrease in your bill. If you need to consolidate debts or you need money for medical bills or college expenses, you may consider shopping around for a HELOC since lenders are likely to price in the Fed’s cut immediately.

4: Keep it in perspective

The take away here is that the Fed is on your side. This rate cut won’t be the silver bullet that fixes the housing market. But it’s apparent that Fed is in a rate cutting mode, and the cumulative effect on that will help consumers. There are a number of things the Federal Reserve can’t control, like the impact of the credit crunch.

You need to look at inflation, job growth and the overall health of the economy as indicators of when this housing crisis may subside. When we get down to it, there are two issues here, according to McBride. That’s inventory of houses on the market and the affordability of houses. Interest rate cuts won’t do much to make that go away. Sometimes, it’s just a matter of time.

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