The Federal Reserve spoke loudly this week with a huge interest rate cut – three quarters of a percent – and it may cut more next week. Mortgage rates nationally also fell this week to near four-year lows. And there may be new help in an economic stimulus plan from Washington.
Here's what it all means for home loans.
Q: Is Tuesday's Fed cut a big break for people with adjustable-rate mortgages?
A: For many it will be. Interest-rate indexes that ARMs are typically tied to have been falling alongside the Fed's four rate cuts since September. That means when the loans reset this year, monthly payments won't rise as dramatically for many subprime and prime borrowers with adjustable rate mortgages.
Subprime buyers may well see smaller increases in their first reset, which typically comes after two or three years. And they may see no increases or even see decreases for monthly payments that adjust every six to 12 months afterward, said Vicky Henderson, senior loan consultant at Sacramento-based Vitek Mortgage. It all depends on whether the rates continue to stay low.
Henderson said easing stress on such borrowers was likely a major point of the Fed's action.
"If they can decrease the amount of loans going into foreclosure and keep people paying on those loans, what a huge benefit that will be," she said.
Most of those defaulting on their home loans and losing their homes in the Sacramento region have ARMs.
Q: Does the Fed's cut mean that mortgage rates also fell three-quarters of a percent?
A: No. Mortgage rates did fall this week – to a national average of 5.48 percent for a 30-year fixed-rate loan. But they didn't fall anywhere near three-quarters of a percent.
Capital-area loan officers say they ran hard all week talking to borrowers with false expectations. Most thought the Fed had severely cut mortgage rates and wanted to refinance their existing loans.
But mortgage rates are somewhat unpredictable and follow their own set of rules. They can fall when investors are gloomy about the economy and then rise on fears of inflation.
On Wednesday, mortgage rates did both. It was one of the most volatile days that many mortgage brokers and bankers have seen in years, they said. Interest rates fell sharply in the morning when the stock market fell 300 points. Then they climbed dramatically in the afternoon when stocks roared back and ended 300 points higher, Henderson said.
Many borrowers, promised the lowest rates in the morning, couldn't lock them in before rates began climbing again, she said.
Overall, though, mortgage rates tend to follow the direction of Federal Reserve moves. This week's reported rates were the lowest since the week of March 25, 2005, federal mortgage giant Freddie Mac said Thursday.
Q: Have these rates triggered a blitz of refinancing?
A: "We're getting a surge of phone calls," said Bob Bader, owner of Arden Mortgage in Sacramento. Bader also said many of those calling mistakenly believe rates fell by three-fourths of a percent. He said there has been no big surge in applications, yet.
Henderson, too, cited "a huge amount of interest in refinancing" following the Fed cuts. She said many want to get out of ARMS and into fixed-rate loans. In her case, though, "it's definitely translated to more applications."
The Mortgage Bankers Association also sees an increase. It reported on Thursday that refinance applications last week were 92 percent higher than in early November and up 16.9 percent from the previous week.
Financial specialists say those considering a refinance should consider more than the interest rate. It depends on your long-term goals, they say. Sometimes it's better to pay more per month to get a fixed-rate loan.
Meanwhile, some people are out of luck even with lower rates. They simply can't refinance because they owe more on their current loan than the house is worth.
How low should the interest rate be before you refinance?
"Obviously, it should be below the rate you're currently at," said Sacramento financial adviser Wornel Simpson. "It depends on how long you are going to stay in the house. Are you going to sell in the next year or two? There's a lot of variables."
Call The Bee's Jim Wasserman, (916) 321-1102
