I received a call from a client yesterday. He had heard that the Federal Reserve had cut key interest rates to a historic low. I quickly scanned the latest headlines, saw that the stock markets were rallying and began to ponder what this news meant for my industry.
In short, the Federal Reserve cut its key interest rates down to .25 percent, a full quarter point lower than anticipated. The previous rate of 1 percent was already the lowest rate in some 50 years. Though the immediate affect of the rate cut was felt strongly throughout the stock market, analysts continue to warn that the economic outlook will not be getting better anytime soon.
Though the rate cut will have very little impact on 30-year fixed mortgages, it will be the short term packages which will benefit the most, unless the Fed finalizes their plans to purchase mortgage backed securities. Loans with variable rates such as home-equity lines of credit, which are directly tied to the prime rate, will see interest rates and monthly payments decline. A word of caution on those lower rates, however. Make sure to check that fine print because you may already be at your interest rate minimum according to the original loan agreement.
Rates are still very attractive. Most analysts expect 30-year rates to be somewhere in the neighborhood of 5 ? percent by the beginning of the year…over 1 point lower than where the rates where two months ago. With the current economic concerns, I do not believe those rates will increase significantly any time soon, unless, of course, there is some sort of speedy economic recovery.
As the government works to bail out the struggling economy by implementing programs such as the plans to buy up debt and securities from Fannie Mae and Freddie Mac, which, in turn, would reduce their financing costs, those savings would be passed on to borrowers in the form of lower mortgage rates.
Unfortunately, lender requirements have become rather stringent. Trying to refinance into a lower rate program requires at least 80 percent loan to value, and with some second or vacation properties, that number hovers around 70 percent. With declining home values and tighter credit requirements, unless you have a tremendous amount of equity in your home, you are pretty much out of luck. Obviously, if you are stuck with negative equity, a refinance will simply be impossible.
Speaking of lender requirements, if you are looking to take advantage of lower rates by purchasing a home, you may find that to be a challenge as well. Full loan documentation will be required to take advantage of the best rates available, and let’s not forget about a great credit score and a large enough down payment to make it all happen.
Unfortunately, most expect home values and the financial markets to continue to fall through the better part of 2009, before we can expect any significant change. In fact, many believe it will get worse before it gets any better. Therefore, do not expect big changes in interest rates over the next year either.