But, I Thought Rates Were Falling. Won’t That Help Me? The Federal Reserve has been lowering rates to bail out the economy. Does this mean that those mortgage rates will fall? In some cases yes in most cases no…read on. Let’s start with the 30-year fixed rate mortgage. The 30-year fixed rate mortgage 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. True, even as the Fed has lowered rates, the 30-year fixed has come down, but that’s because of the outlook for slower economic growth in the months ahead. While the decline in treasury yields has helped push mortgage rates lower, the decline in long term rates hasn't been in lockstep thanks to the fact that these mortgages are securitized and sold on the global market. Investors now demand a higher risk premium on these mortgages due to higher delinquencies and foreclosures. Next let’s take a look at 7 and 5-1 Adjustable Rate Mortgages (ARMs) Yes, this is good news if your 5-year (or 7 year) ARM is pegged to a treasury index. So if you’re facing a reset on, say, a $200,000 loan, you’re now getting a payment increase of about $150 a month, as opposed to $370 a month, which you would have had before the Fed started cutting rates. Do the Fed Rate Drops Help Sub-Prime Mortgage Holders? Nope. Unfortunately if you have a sub-prime ARM it is more than likely pegged to LIBOR, which has moved in the opposite direction. Because of the liquidity issues in global financial markets, LIBOR rates have actually increased at the same time that treasury and other benchmark yields have been declining, so the Fed lowering rates today would not help too many sub-prime mortgage holders. Even with lower rates, the home still must appraise for the amount being borrowed plus another 10 to 20%. In most places, depreciation alone has eliminated the opportunity to refinance and take advantage of rate adjustments. How are Home Equity Lines of Credit Affected? How about my Home Equity Line of Credit (HELOC): Yes, if you have that home equity line of credit that you used to renovate your bathroom/kitchen recently, then when the Fed lowers rates, your rate comes down as well. That’s because HELOCs are predominantly pegged to the prime rate, which moves in step with the Federal Reserve. Christine R. Willard, Realtor, Broker, GRI, CRS, RECS, e-Pro, LMC, PME Greater Triad Homes 1-800-234-367 extension 3816 OR want to know more? |