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Fed Cut: What It Means for Your Mortgage
by Diana Olick
Tuesday, January 22, 2008
Provided By: CNBC
On days like this, I think it’s important to go back to the ol’ mortgage
primer and figure out exactly what all this news means to you, to your
mortgage, to your home equity line and to your home’s financial future.
I’ve said it before, and I’ll say it again: the 30-year fixed is not tied
to short-term treasuries.
Fixed mortgage rates are tied to long-term bond yields that move based on
the outlook for the economy and inflation. And guess what? The long-term
outlook for the economy isn’t exactly rosy right now.
Today’s rate cut does affect short-term adjustable rate mortgages, but not
really as much as you might think. Why? Because this rate cut was already
priced into the market, maybe not three quarter's point, but definitely a
half-point. So if you are facing a reset on your ARM, you’re in much
better shape today than you were just six months ago.
For example, if your rate adjusts Feb. 1st, and your ARM is pegged to the
1-year treasury, than your reset is going to be to 5.25 percent as opposed
to the 7.5 percent that it would have been in August. That’s going to make
the payment much more manageable.
So does this cut stem the foreclosure crisis? Maybe a bit on the margins,
but not really, and here’s why: the bulk of the folks facing foreclosure
because they can't make their monthly payments have no equity in their
homes and no money to put down on a refinance.
While rates might be lower, this is a market where lenders and investors
are much more aware of risk and will gravitate toward borrowers that
represent less risk. So many folks will still find themselves in trouble.
For people who are having trouble paying the initial rate on the loan,
forget it. No help there.
As for those looking to buy a home, that is, get a new mortgage, while ARM
rates may be lower, the mortgage landscape is still a far far different
tundra than it was just a year ago. You can’t do a stated income loan
anymore, and you can’t do 100 percent financing. Tighter standards don’t
change with a rate cut.
And I want to add my two cents here about a home equity line of credit.
Yes, the rates are lower now, but I really don’t think that means we
should all start using our homes as ATM’s again, which is what got us all
in trouble in the first place. This is a time to pay off debt, not to
gather more. The housing market is still in trouble.
The statement from the Federal Reserve this morning: “incoming information
indicates a deepening of the housing contraction as well as some softening
in labor markets.” We all know the price correction in housing is still
underway with home prices across the nation (yes, I know, some markets
worse than others) expected to fall further, so this is no time to put
your home in more hoc. Just my two cents, which I’m putting in the bank as
we speak
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