Fed Rate Cut Opens A Window For Refinancers

Fed Rate Cut Opens A Window For Refinancers

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The Federal Reserve Bank cut interest rates by three quarters of a point this week, opening a window for consumers who need to refinance their homes. With hundreds of thousands of adjustable-rate mortgages expected to reset in 2008, the timing of this cut is on the mark for credit-worthy consumers.

The Lowest Mortgage Rate In Four Years

The new rate, at 3.5% will eventually filter down to mortgages, indeed the trend has already started. According to Bankrate, the average rate for a 30-year fixed mortgage now stands at 5.57%, the lowest it has been since March 2004.

The Fed’s Emergency Action

The Fed’s rate cut has been called an “emergency action” as the federal government looks at ways to stem the current mortgage financing crisis. With so many homeowners holding low-rate adjustable mortgages expected to reset at much higher rates over the next few months, politicians are seeing a crisis in the making.

When 2007 began, the subprime mortgage mess unfolded resulting in a higher number of loan defaults leading to a surge in home foreclosures. The U.S. Congress encouraged the relaxing of qualifying standards in the early part of this decade by expanding home ownership to lower-income consumers. Barely able to make mortgage payments many at-risk homeowners weren’t able to meet their higher monthly payments which began to reset in 2006 for some.

Qualifying For Refinancing In 2008

Despite the good news of a rate drop, not every homeowner will qualify for refinancing. Mortgage companies have tightened up lending requirements and are insisting that the following standards be met before lending money:

Consumers must have good credit. Those homeowners who have already defaulted on their loans are not eligible to refinance and many who are behind on their payments and approaching foreclosure will also be left out. A good to excellent credit score is what most mortgage companies are now requiring.

Adequate documentation is required. Those “no-doc” or no documentation loans from just a few years ago have disappeared. Today, consumers must show proof of income, show job stability and they may have to show their federal tax returns dating back as many as the past three years.

Refinance Now or Lose Out

Some homeowners are likely to want to wait and refinance when rates drop further in order to gain the best rate possible. This could be a mistake for two reasons:

  1. There is no guarantee that rates will drop much further, and
  2. Mortgage rates are already below historical averages.

Any delay on seeking refinancing could close that window for some consumers. If your financial picture is stable right now, what will it be in April or in August? Industry experts are advising consumers needing to refinance their loans to act while they can, before the refinancing window closes for good.

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Comments

  1. W. James
    W. James 29 January, 2008, 01:35

    Lower interest rates, while helping borrowers, lowers the incomes of all those who have invested in fixed income securities like CD’s, which are already at very low rates of less than 5%. Cutting these rates in half means a return of only two dollars per month per thousand dollars saved per year, or in other words an investment of one half of a million dollars will bring in an income of only $12,500 per year, or only a little over $1,000 per month. Lover interest rates mean a correspondingly lower value on a dollar. If the government succeeds in doing away with Social Security as we now know it, it means we all should be buying tents and sleeping bags and air mattresses. Does anyone in this country own a hand computer? These interest rates are ridiculous, to say the least.

  2. MattKeegan
    MattKeegan Author 29 January, 2008, 16:57

    W. James, I am with you. Interest rates are already below historic low averages, meaning the average consumer is already getting a great deal.

    Social security recipients and others who rely on interest income for living will see their income reduced further.

    Helping one set of consumers often means that another set is left out in the cold.

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