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Adjustable Rate Mortgage Holders Prepare for Increase in Interest Rates
Katz Mortgage Team of VanDyk Mortgage Corporation, has announced that Interest rates are on the rise and many home owners who have adjustable rate mortgages may see increases in their forthcoming annual adjustments.
In addition, in just this past week, the US Treasury 10 year Note dropped to 4.4% for the first time in a year. This translates to thirty-year fixed rate mortgages dropping from the high 6% range in July of this year down to the mid 5% range today. Many on Wall Street feel that a slowing of the real estate market, coupled with higher energy costs have pushed rates down. They also caution that as unemployment stays around the 4.5% mark and the economy starts to heat up, inflation fears will once again push rates in the opposite direction.
Federal Reserve Chairman Alan Greenspan made it clear in 2004 that the Federal Reserve would be increasing short-term interest rates at a "measured pace". With the US Dollar at its weakest point in seven years, oil prices unstable and the evaluation of other economic indicators, the Fed Funds Rate was hiked seven times from 1.0% to 2.75% since June 2004 in an effort to curb inflation. Some economists believe it won�t stop until the Fed Fund Rate hits 4.0%.
Consumers with revolving debt accounts tied to the prime rate have seen the effect through rising interest rate charges, as the prime rate always rides 3% above the current Fed Funds Rate.
Mortgage interest rates are affected indirectly by these changes. An increase in the Fed Funds Rate has an impact on financial markets as a whole, but mortgage rates may go up or down based on the perception investors have of current economic statistics and their reaction to the Federal Reserve�s after-meeting statements.
Stephen Katz, of Katz Mortgage Team states, "Many of our clients took advantage of the super low ARM rates of 3 and 4 years ago and have saved a tremendous amount of money. But now we urge these homeowners to take a look once again at refinancing to a more stable fixed rate. If a family plans to stay in their current home for more than two years, or if they plan to keep it as a rental, now is the perfect time to switch horses and go back to a fixed rate."
In general, when economic data indicates we have a slow-down occurring in the economy, investors tend to sell off stocks and reallocate that money to the safe haven of bonds and mortgage-backed securities. The purchase of mortgage-backed securities drives interest rates down. When economic data says there is growth in the economy, the stock market typically rallies and mortgage-backed securities sell off to fuel that stock market rally. This drives mortgage interest rates up.
The current market reflects the reaction of investors reading between the lines on comments made by the Fed, and mortgage interest rates are going up. This will have an affect on home owners with adjustable rate mortgages (ARMs) tied to indexes that are based on short-term interest rates. This includes the 11th District Cost of Funds, 12-Month Treasury Average (MTA), London Inter Bank Offering Rates (LIBOR) and others.
"Today there are at least a dozen ways to package up a fixed rate mortgage loan", Katz states. "Our advice is to spend some time discussing your entire financial situation with a trusted mortgage consultant. How long do you plan to stay in the house? What other debt do you have? Are you concerned about the payments? These are just a few of the questions that need to be asked to determine the best new loan."
Katz reiterates, "We are in this tenuous window of opportunity with rates. If one has a 3 or 5 yr ARM, a low fixed rate may be the best Christmas present they get this year."
Consumers who foresee paying an interest rate that is significantly higher may want to consider refinancing to take advantage of the stability of a fixed rate mortgage.
This is also a good time for borrowers who started out in an adjustable rate loan due to a poor credit score to transition into a fixed rate loan if they can. Once a track record of making mortgage payments on time and in full has been established, this should have a positive effect on the credit score and there's a good chance the borrower may now qualify for a loan with a lower interest rate.
As with any decision to refinance, it is important to take the terms of the existing loan, the cost of the new loan, and the borrower's long-term needs into consideration. A qualified mortgage professional should help weigh out the options by providing a clear assessment of available loan programs for the consumer.
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