What Is The Fed Funds Rate?

October 31, 2007 by · Leave a Comment
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The Federal Open Market Committee adjourns from its two-day meeting this afternoon and is widely expected to lower the Fed Funds Rate. This does not mean that mortgage rates are being lowered, too.

The definition of Fed Funds Rate from the Federal Reserve:

The federal funds rate is the rate charged by one depository institution on an overnight sale of immediately available funds (balances at the Federal Reserve) to another depository institution; the rate may vary from depository institution to depository institution and from day to day. The target federal funds rate is set by the Federal Open Market Committee (FOMC).

Notice that the words “consumer” and “mortgage” are nowhere to be found. That’s because the Fed has nothing to do with them.

The Fed does not control mortgage rates.

The Federal Reserve’s policy changes impact banks, which then impacts consumers in the form of “looser” or “tighter” credit standards.

In lowering the Fed Funds Rate, the Federal Reserve stimulates the economy. In raising the Fed Funds Rate, it slows the economy. The big risk, therefore, is lowering too much (which promotes inflation) or raising too much (which retards growth). It’s a difficult dance.

The FOMC will release its policy statement at 2:15 P.M. ET.

FRB: FAQs: Monetary Policy


How To Save Money By Choosing A Better Closing Date

October 30, 2007 by · Leave a Comment
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Choosing the proper length of a mortgage rate lock can save you money

When a loan officer locks a mortgage rate for you, that rate is tied to an expiration date.

The expiration may be 30 days, or 75 days, or 90 days, or more into the future, but so long as the rate is “locked”, the bank is committed to delivering that rate to you at your closing.

What most people don’t know is that the longer the rate lock, in general, the higher the interest rate and/or fees and that’s because banks can’t predict the future.

The more time that passes between today and your rate lock expiration, the more likely it is that market conditions will have changed from where they are today, and the bank will be “below market” on your individual loan.

Therefore, banks compensate for this “time risk” by increasing their rate of return (i.e. your mortgage rate), and/or charging “extended lock fees” to borrowers.

To lenders, rate locks represents a huge risk — what if its prediction of the future is wrong?

Rate locks vary from lender to lender, but in general, they move in 15-day increments — 15-day, 30-day, 45-day, et cetera. After 90-days, rate locks tend to move in 30-day increments. The shorter the time, generally, the lower the rate and/or fees.

So, when you’re negotiating a new contract on a home, it makes more sense set a closing date 30 days in the future as opposed to 40 days; 45 days as opposed to 46. By keeping your rate lock commitment days as low as possible, you’ll help save money long-term.

There’s no sense in paying for extra rate lock days if you don’t need them.


It’s A Terrific Time To Revisit Your Mortgage Rate

October 29, 2007 by · Leave a Comment
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If you bought your home sometime since March and your mortgage is a conforming home loan, you may be able to take advantage of the current mortgage market conditions.

As of Friday, mortgage rates were near their lowest levels of the year.

Of course, not every conforming borrower is eligible. For example, if you bought your home without a downpayment, or if your home has decreased in value since your purchase date, lower rates may be not be available to you.

With the Federal Reserve meeting this week, mortgage rates are not expected to stay low for long. The last time the Fed met in September, it lowered the Fed Funds Rate. Later that day, mortgage rates increased on concerns about the U.S. economy.

The Fed is expected to lower the Fed Funds Rate again after its two-day meeting October 30-31, 2007.

If you haven’t heard from your loan officer about last week’s dip in rates, try contacting him/her directly.

Or, if you’d like the name and contact information of a new loan officer, one that I know and trust, contact me directly anytime.


Is A Fed Funds Rate Cut Good News Or Bad News? It Depends On Your Perspective.

October 26, 2007 by · Leave a Comment
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Changing the Fed Funds Rate creates a Domino Effect on homeowners

The Federal Open Market Committee is widely expected to lower the Fed Funds Rate next week.

For holders of credit cards and home equity lines of credit, this is good news.

Both of these financial products feature interest rates tied to Prime Rate. Prime Rate is tied to the Fed Funds Rate.

When the Fed Funds Rate comes down, therefore, so does the rate of borrowing for credit cards and HELOCs.

For mortgage rate shoppers, a drop in the FFR could be bad news.

When the Fed lowers the Fed Funds Rate, it signals that the U.S. economy is weakening and that tends to weaken the U.S. dollar. When the dollar weakens, the value of dollar-denominated securities weaken, too.

Mortgage bonds are denominated in dollars, of course, so when the dollar loses value, mortgage bonds lose value as well. This causes mortgage rates to move higher.

After the Fed’s last meeting, it lowered the Fed Funds Rate by 0.500% and, predictably, mortgage rates headed higher in response.

According to Bloomberg, as of this morning, market players are predicting with 90 percent certainty that the Fed will lower the Fed Funds Rate by at least a quarter. That means that the currently low level for mortgage rates may not last much longer.


Monthly Reiteration: Real Estate Is Not A National News Story

October 25, 2007 by · Leave a Comment
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The Wall Street Journal used a lot of ink this morning on September’s Existing Home Sales data, including the chart below. It’s frightening to the lay person who may not know how to interpret data like this.

Remember: real estate is local.

Yes, on a national level the number of homes for sale in increasing and the housing market is showing weakness, but on a local level, the story is always different.

And, despite chunking the national data into 28 “Major Markets”, the figures below still can’t be considered “local”. The Miami-Fort Lauderdale market, for example, is a 31.6 mile tract of land.

Real estate markets vary by neighborhood and even by street. It’s why one zip code may be hot, and a neighboring zip code may be flat. It’s also why we should ignore national real estate price patterns and focus on the local trend instead.


Simple Real Estate Definitions: Adjustable Rate Mortgage

October 24, 2007 by · Leave a Comment
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Adjustable rate mortgages

Adjustable Rate Mortgages are mortgages for which the interest rate is subject to change over time according to pre-defined rules.

ARM is a common acronym for Adjustable Rate Mortgage and every ARM has similar features:

  1. An initial fixed period during which the mortgage rate doesn’t change
  2. An initial interest rate that is charged during the initial fixed period
  3. An index that is used to calculate the new interest rate after an adjustment. An index is a variable and is usually assigned to LIBOR or Treasuries.
  4. A margin that is a constant added to the index to calculate the new interest rate after an adjustment. Margins vary from 1.500% to 6.999%, depending on the type of mortgage.
  5. Caps which define the limits by which an ARM can adjust during any given adjustment phase, and during its life. Caps can prevent ARMs from adjusting too far too fast and can vary from 2.000% to 5.000%.

Now that we understand the “parts” of an ARM, we can understand how it works.

ARMs are generally named for their initial fixed rate period. A “5-year ARM”, for example, means that the mortgage interest rate will not change for the first five years.

After the initial fixed period, an ARM adjusts to its new interest rate according to the following formula:

(New Interest Rate) = (Index) + (Margin)

So, if the index is LIBOR (which is 4.82% right now) and the margin is 2.250%, the new rate on the adjusting ARM will be 7.07%. The loan will also adjust according to the same formula on every 1-year anniversay thereafter.

Of course, there are variation of ARMs that differ from the one described above, but this definition fits most of them.


How The Stock Market Is Directing Traffic For Mortgage Rates

October 23, 2007 by · Leave a Comment
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The stock market is directing traffic for the bond market

Monday was a flat day for stocks, and it was a flat day for bonds, too. Mortgage rates idled.

Tuesday, with no economic data hitting the wires, market participants will be looking for direction elsewhere.

Some likely candidates include:

  1. The price of oil. If oil prices continue to rise, it will place inflationary pressure on businesses and consumers. That is bad for mortgage rates.
  2. The value of the dollar. A recent rally in the dollar should attract foreign investors to the U.S. markets. That is good for mortgage rates.
  3. Corporate earnings statements. Apple and American Express both showed well in Q3. A rally in the broader stock market will pull money from the bond markets. This is bad for mortgage rates.

Mostly, markets are taking very few risks in advance of the Federal Open Market Committee meeting next week. Momentum rules.


A Common Tale: John Smith From Franklin

October 22, 2007 by · Leave a Comment
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Ben Franklin may have been the inspiration for the country's most popular city name

Could we be running out of names for United States cities?

Did you know that the most common city name in America is a tie between Franklin and Salem? There are 36 instances of each.

According to Wikipedia, here are the most common city names in America.

  1. Franklin (36)
  2. Salem (36)
  3. Washington (32)
  4. Springfield (31)
  5. Clinton (30)
  6. Georgetown (27)
  7. Greenville (26)
  8. Madison (26)
  9. Fairview (26)
  10. Marion (24)

There are also 17 cities named Portland and 16 cities named Paris. See the complete list at Wikipedia.

One name that didn’t make the list? Well, let’s just say that it’s a Halloween “hotspot“.


Just Because You Can Borrow From a 401(k) Plan Doesn’t Mean That You Should

October 19, 2007 by · Leave a Comment
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Borrowing from a 401(k) can be a costly long-term investment

According to the Wall Street Journal, the number of Americans taking loans against their 401(k) plans is increasing because most plans allow participants to borrow funds to purchase a home or to avoid foreclosure.

But just because the avenue is there, though, doesn’t mean that borrowing from a 401(k) is a good idea.

Here’s why: When you put money into a 401(k) plan, you use pre-tax dollars but when you repay a 401(k) loan, you use post-tax dollars.

Therefore, if your tax rate is 28%, it takes $1,388 of income to repay each $1,000 increment of your loan. Then, when you withdraw the funds at retirement, the money is taxed again.

Double-taxation is costly, but the other less-well-known impact of a 401(k) loan is that you can lose the long-term power of compounded interest on your entire portfolio.

This isn’t to say that a 401(k) loan is bad, it just may not be right for you. So, if you’re planning to withdraw from your 401(k), be sure to talk with a qualified financial professional first.

If you’d like a referral to a trusted professional, call or email me anytime.


How Terrible Housing Data Can Actually Help Push Home Values Higher

October 18, 2007 by · Leave a Comment
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Once again, the headlines may be misleading you. It’s a good thing that Housing Starts dropped last month — despite what the papers say.

A “housing start” is a new residence on which construction has started. Yesterday, the government released September 2007’s Housing Starts data for the country.

  1. There was a 10.2% drop in Housing Starts versus August 2007
  2. There was a 30.8% drop in Housing Starts versus September 2006

The headlines are trying to tell us that this is bad news for the U.S. economy. On the contrary — this is excellent news!

Determining a home’s value is mostly based on Supply and Demand for that particular home. In its own neighborhood, an over-supply of like homes can be a significant drag on the value of all homes in the neighborhood This is a concept many people understand.

So, when builders stop adding new supply to the housing market — on a neighborhood-by-neighborhood basis — the existing demand for homes can “catch up” with the existing supply of homes. This can rebalance the Supply and Demand equation and place upward pressure on home values.

Many homeowners (and future homeowners) can agree that rising home values is a good thing. Rising home values creates wealth and opportunity.

So, just because the headlines read that the news is bad, that doesn’t mean that it really is bad. Housing Starts are down and that is a good thing.


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