CHECKMATE REAL ESTATE

FEDS TO CUT RATES DECEMBER 11th 2007

admin — Tue, 11 Dec 2007 13:38:50 +0000

The Feds are looking to cut rates to stem the rising credit crisis. I am guessing that this will lower interest rates by 50 points which will put the rate at 4%.

For those who read my blog dated Oct 19^th below know that when the FED cuts rates you will see an immediate reduction on all Prime Credit (Home Equity Line of Credits, Credit Cards) and short term ARMs (Adjustable Rate Mortgage) based on the LIBOR index. This is good news.

The Feds have increased rates 17 times from 2005 – 2006. Now that inflation is in check (due to Consumer Spending and Jobs) and the current credit crisis, the Feds are looking to cut rates to entice consumers to start buying again. We recently had two rate cuts to get us to 4.25%. So expect the FEDS to do what is right

MORTGAGE HELP ON THE WAY?

admin — Tue, 11 Dec 2007 13:19:59 +0000

Looks like help is on the way from the government. With this being the beginning of the political season, the spin has begun from your favorite political action figure. Hillary and Edwards have a solution to the mortgage crisis. Now Obama has announced one as well. But the Bush Administration is going to top them all. On December 6th the administration announced a program that will FREEZE for 5 years certain subprime mortgage products to combat the rising foreclosure crisis. Bush to talked in broad generalities, as per usual, with Treasury Secretary Henry Paulson and Housing and Urban Development Secretary Alphonso Jackson provided the mental heavy lifting.

So what does this mean to you? Well if you currently own a home that is slated to increase your mortgage payment within the next year (due to having a subprime or Adjustable Rate Mortgage Note) you may be eligible for this program. This is great news for many borrowers, but others may still be left out in the cold. The time is now to reach out to real estate professionals who are certified and understand how you can benefit in this changing environment.

What is a ARM?

admin — Fri, 09 Nov 2007 14:02:43 +0000

No, it is not a body part but an acronym for Adjustable Rate Mortgage and it has been getting A LOT of negative press lately.

It seems a lot of Loan Officers were selling these products to homeowners to help them make payments on their dream homes. All was well, for the first year until these homeowners payments started to increase. Then when they went back to their friendly neighborhood Loan Officer to refinance into a new loan they found out that they could not because there was a prepayment penalty attached to the first loan, which increased the amount on the balance that the homeowner owed, therefore making it impossible to do the refi. Now the poor homeowner is stressed out. They can no longer afford the payments. They can not refi. And they can no longer sell the property because it is now a buyers market. So the DREAM home has now become a NIGHTMARE. What HAPPENED?

1. The Loan Officer either did not understand or did not care what an ARM would do for their client

2. The Homeowner did not understand the implications of the initial low payment for that high priced home.

3. The industry was pushing RATES as the end all and be all of how to evaluate a loan product.

NOW is the time to get educated about what is going on in the industry and work with professionals who can assist you with this education.

The Federal Reserve Lowers Interest Rates, What does that Mean to you?

admin — Fri, 19 Oct 2007 11:07:11 +0000

In order to answer this question, it is helpful to understand the four major interest rates that are affected by the Fed:

Discount Rate (currently 5.25%) - the interest rate that banks pay when they borrow money directly from the Fed. The rate has been largely symbolic in the past because hardly any banks take the Fed upon their offer these days!

You see, banks prefer to get short term financing by:

Issuing “commercial paper” these are short term IOUs of typically one to ninety days that are sold on Street investors. Interest rates on these short term loans are often better than the discount rate offered
Borrowing money from other financial institutions using the Fed Funds Rate as illustrated below. In most cases, this isÂ better than the discount rate offered by the Fed
Nonetheless, many banks in today’s “credit crunch” environment have actually taken advantage of this opportunity from the Fed in recent weeks.

Fed Funds Rate (currently 4.75%) - the interest rate that banks pay when they borrow money from each other here in the US. This rate is also determined by the Fed because banks in the US are part of the Federal Reserve System. You see, the Fed’s main role is to maintain “monetary stability” by keeping a close eye on the flow of money throughout the economy. One way they do this is by regulating the interest rates that banks charge each other for short term funds.

LIBOR Rate (Overnight LIBOR is currently 4.94%) the London Interbank Offered Rate (LIBOR) is the interest rate that banks pay when they borrow money from other banks anywhere in the world (primarily in the international wholesale money market based in London). There are various types of LIBOR rates including the 1 week LIBOR, 1 month LIBOR, 6 month LIBOR, and 1 year LIBOR; these are the rates banks would pay if they want to borrow funds for 1 week, 1 month, 6 months, etc. Although the LIBOR rates are determined by the financial markets at any given time, they are very closely related to the Fed in that LIBOR most often changes when the market anticipates that the Fed will change their Fed Funds Rate. LIBOR is the base rate that is used on most adjustable rate mortgages (ARMs) in the US and large corporate / commercial loans. The reason LIBOR is used most often for US adjustable rate mortgages is because LIBOR is really the most accurate measure of a bank’s cost of borrowing funds since most banks do business internationally these days.

Prime Rate (currently 7.75%) the Fed Funds Rate + 3; this is the base rate that is used for mostÂ consumer loans such as credit cards and home equity lines of credit, as well as most small business loans. Like the LIBOR, the Prime Rate is also tied to the Fed Funds Rate.

In response to the economic slowdown that has occurred due to the current credit crisis, the Fed lowered the discount rate several weeks ago and they lowered both the discount rate and Fed Funds rate on September 18, 2007. Does this mean that more rate cuts are on the way or should we expect that the Fed will sit tight now that they have taken some action?

This largely depends on whether inflation remains under control.

You see, as the Fed lowers the Fed Funds Rate, the business and consumer-based interest rates of LIBOR and Prime will also go down. The Fed would be reluctant to continue lowering rates if they feel that businesses and consumers would start borrowing and spending so much money that inflation will go up significantly.

Remember, the Fed’s main goal is to “maintain monetary stability” by keeping a close eye on the flow of funds in the US economy.It would be reckless of them to artificially encourage too much borrowing and spending as this would only artificially drive up asset prices and cause money to lose its purchasing power. This phenomenon is known as “inflation.” The good news, however, is that inflation seems to be under control based on some of the latest economic reports.

How does the Fed affect mortgage rates?

Well, if you have a home equity line of credit based on Prime or short term ARMs based on LIBOR, you should see an immediate reduction in your interest rate in the coming weeks. However, if you are considering a fixed rate loan or longer term ARM with a fixed period of 3, 5, 7 or 10 years, rates on those types of loans are not directly related to the Fed. Instead, these rates are closely tied to the Mortgage Backed Securities that trade on the bond market.

With all this in mind, it is more important than ever to work with a Certified Mortgage Planning Specialist â„¢ who can decipher marketconditions and help you make informed decisions in today’s volatile market. A CMPS Â® professional can look at Fed decisions and economic reports that are coming out and help you make the right mortgage choices. Whether you have or are considering an ARMor a fixed rate loan; whether you are buying, selling or refinancing a home; whether you are dealing with a primary, vacation orinvestment property; now is the time to be dealing with an expert.