Tuesday, September 18, 2007

The Federal Reserve's Big Announcement

They did it! We were all hoping they would! The Federal Reserve lowered the Fed Funds Rate by a half of a percent. The Fed Funds Rate is a short term rate that banks charge each other. This is important to consumers because it affects the cost of things like credit cards, home equity lines, and auto loans. It is also important because it has a direct effect on the Prime Rate, which is the rate banks charge their best customer (usually corporations). Bank of America lowered their Prime Rate just minutes after the Fed made their announement; a few others including Wells Fargo followed. This half percentage reduction is the first of its kind since 2003, and the prime rate hadn't budget since mid 2006.

The first to be affected will be those with home equity lines, as they are directly linked to the prime rate. Credit cards in some cases are also linked to the prime rate, but they will take longer to adjust. Those who have adjustable rate mortgages and are soon facing a reset may have a bit of relief as well.

We have yet to see what effect this short term rate cut will have on new mortgages. The long term mortgage rate is determined by the market and inflation. The best thing you can do is shop around. Don't take the first quote you are given; visit two or three different lending institutions before you commit.

Don't be fooled by teaser rates! The interest rate advertised in the paper is not necessarily the rate you will get, or the rate you want if the terms of the loan are undesirable. The banks will do whatever they can to get you in the door; many walked through the door because they saw an advertisement for 1.25% home loans. That is how we ended up in this mess. That person is now facing foreclosure as they owe more than they did when they purchased and their loan has just reset to an amount they cannot afford.

It has been said that one or two percent of the population will be directly affected by this change, which is substantial. The Fed is scheduled to meet again at the end of October and then again in December. Of course we do not know for certain that there will be another cut. My father says that if you talk to six different economists you will get nine different predictions. What we really need in this market is trust...from the buyers. People just need to keep buying houses. If everyone was scared off by fear of the economy crashing, well, then it would.

I toured properties all over the city today. There is a lot out there; something for everyone. Talk to your lender and see what you qualify for. The time to buy is in a slow market; if you wait for the market to improve you have already lost your window.

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