Biggest Funds Rate Cut on Record since 1990!

Many of you may already have tuned into CNN, MSNBC, or simply overheard some of the financial news that has occurred recently.  I wanted to take some time and explain what these recent changes mean for all of us. 

In a surprise move this morning, the Federal Reserve Bank cut the Fed Funds Rate by .750%.  Furthermore, there is currently a 100% chance of a .25% cut next week and a strong possibility of a .50% cut next week. 

What does all of this mean?

• For those of you who have home equity lines of credit, business lines of credit, and credit card balances you will see an immediate improvement in your rate and payment.  The WSJ PRIME rate is now 6.50%.  For example, the.75% rate cut will result in a savings of $62.50/Month per $100,000. 
• The Fed rate cut will also help those who have short term adjustable mortgages as short term interest rates continue to fall.  The PRIME and LIBOR based indexes are most advantageous right now on adjustable rate mortgages.  Lagging indexes such as MTA, COFI, CODI, and COSI will benefit, although at a slower pace.
• Will hybrid fixed rate mortgages and fixed rate mortgages continue to benefit?  The short answer is "maybe."  Mortgage rates have improved to their best levels since June 2005.  When the stock and global equity market is in a panic, investors sell their stock positions and move their money to bonds.  Investors call this a "flight to quality."  When this occurs, home loan rates generally improve.  However, it is important to note that inflation is presently on the rise and that generally has an upward pressure on home loan rates. 

The bottom line is interest rates on all home loans are great right now and it is a great time to review your mortgages.  Do you have a jumbo loan?  Many clients will benefit from a piggyback loan right now instead of a jumbo loan.  As short term rates continue to improve, home equity lines of credit will become more desirable.  After next weeks Fed cut, the PRIME rate may be as low as 6.00%.  Home Equity lines of credit are available as low as PRIME minus .75%.  I would suggest considering a conforming loan up to $417,000 and a home equity line of credit for the remaining balance instead of a jumbo loan.