It 's February and already I broke one of my resolutions!
Accountability can be a good thing, but sometimes it comes back to haunt you. I resolved to blog more this year and got off to a good start. My first blog of the year stated that resolution and sure enough, I blogged 3 times in the first 2 weeks. And now, it's been almost a month!
Instead of talking about credit, I'd like to talk a little bit about interest rates. Unless you gave up computers and all forms of media for the New Year, you've probably been hearing a lot about interest rates lately. The Fed dropped their key rates 75 basis points in between meetings and then another 50 basis points at their scheduled meeting. That's a 1.25% drop in a week's time! Pretty huge!
What does this mean to you?
First off, let's clear up a few things. The Federal Reserve Board does not have a direct impact on long term interest rates. What they do impact is the money banks have to pay to borrow. It usually will have an immediate impact on a bank's "prime" rate. The prime rate is what a bank will lend it's money at to it's best customers. Many bank product's rates are tied to prime. Home Equity line of credit, Business credit lines, some credit cards are a few examples of loans that will see lower rates directly by the Fed cuts. If you had a home equity line of credit that's interest rate was at prime, you saw your rate drop 1.25% in a little over a week's time (most banks don't pass this savings on until the next statement month) to 6.5%. On a balance of $50,000 paying interest only, your payment went from $312 to $270 thanks to the Fed. Thanks Fed!
Your savings account interest rate will probably go down. Short term c.d.'s will also have lower rates of return. Treasury Bond yields will go down. This last one is important to you if you have an adjustable rate mortgage due to adjust in the near future that's tied to a Treasury Bond index. Check your paperwork, many adjustable rate mortgages have an index that's instead tied to LIBOR, which is also falling even though it's not tied to the Fed moves. Both of these indexes are down over 2.5% from February of 2007! As an example, the 1 Year Treasury Securities is currently at 2.23% (this was at 5.07% last February), if your margin is 2.75%, a very common margin, your new rate would be 5.00% (2.23% + 2.75% rounded up to the nearest .125%). A far cry from what people with adjustable rates reset faced last February, 7.875% (5.07% + 2.75% rounded up to the nearest .125%). Bottom line, if your adjustable is coming up for a reset, don't panic, check your index and margin and then determine if you'll be better off refinancing or staying put.
Long Term Rates
Okay, so what's happening with mortgage interest rates? 30 Year Fixed rates are higher than before the Fed cuts. Let me repeat that. 30 Year Fixed rates are higher than before the Fed cuts. How is this possible? Again, the Fed does not have a direct impact on mortgage rates. Rates are complicated and are set by market conditions. Mortgage Backed Securities are traded and yields and rates are calculated off of those pools of funds. Mid-term Adjustable Rate Mortgages, those having an initial fixed rate of 3-5 years, have gone up less than the 30 Year rates, but nonetheless, have gone up. 1 Year Adjustable Rates have come down a little bit. So for all their efforts, rates are rising.
Perspective
Even though rates have been rising, they still are, historically speaking, pretty low. If you're waiting to refinance, you might have missed your chance. Figuring out when rates are at their lowest is always achieved by looking out your rear view mirrors! So did rates hit their lows a few weeks back or is there more to come? That is the million dollar question.
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