Fed Cuts Rates – How Will it Affect Home Mortgages?

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Thursday Mar 20, 2008

The Federal Reserve cut interest rates again this week (by 0.75% this time) – so what does that mean for your home loan rates? Well, it may actually cause fixed rate mortgages to go up, but if you have an adjustable rate mortgage (ARM) you might see lowered loan rates as a result of the series of Fed cuts that began in September of 2007.

Because the Fed funds rate is more closely associated with the way adjustable rate mortgages are set up than fixed rate mortgages, homeowners with ARMs could experience a drop when their loan rates reset. The Fed cuts, which decreased the central bank’s benchmark rate from 5.25% to 2.25% since September, are expected to counteract loan resets that would have increased significantly (up 3% in some cases). Not all ARM borrowers will see a reduction in their rates, but the Fed’s actions should at least keep ARM rates where they are or permit just a slight rise.

Unlike fixed rate mortgages, adjustable rate mortgages automatically change without the borrower having to refinance. So, when interest rates decline the loan will recalculate and the homeowner will get a lowered mortgage rate. However, over time the rate can increase considerably, which means borrowers with ARMs could end up with larger monthly payments than they originally intended to cover.

Posted at 01:23PM Mar 20, 2008 by Yuval Degani in General Comments[1]

Comments:

Last week’s cut in the federal fund rate means great things for home buyers..even though it may affect ARMS more, the fixed rate mortgage rate gets affected too. It still remains at a historical low. As we head into an active and upbeat spring market, the lowering of the fed rate has already trickled down to mortgage rates, with the fixed rate mortgage again at record lows. Buying a home in this friendly environment helps mortgage borrowers makes the mortgage debt bearable. Building home equity an ongoing long term investment is even more exciting news! Buying a new home now is sometimes one of life’s major purchases. Last week’s move by the Federal Reserve puts home buyers definitely in the driver’s seat. We may never see this again in our lifetime. Why not taken advantage of it now?

Posted by Maria G on March 25, 2008 at 11:25 AM CDT #