Florida Mortgage Information

Some Reservations at The Federal Reserve
Almost all major financial analysts are predicting that the Federal Reserve, under Ben Bernanke’s direction, will leave the Fed rate of 5.25% untouched at their meeting today.  Now, with the recent reports indicating a downturn in sales of durable goods, plus the continuing drop in new housing starts and home values, some think the freeze on rate hikes will last through the end of the year. 
There are some signs that the cooling economy is still stable.  The sale of homes actually crept up slightly from July to August, by about 14%, and consumer attitude is still very positive.  Still, the backlog of homes for sale on the market, decreases in fuel prices, and a drop in consumer spending all indicate the the Fed’s policy of raising rates at every meeting for three years has succeeded in driving down inflation.  But have they gone too far?  Unfortunately no one, including Ben Bernanke and the directors of the Federal Reserve Bank, knows for sure.  As I’ve mentioned before, there are problems with balancing the economy by controlling interest rates, not the least of which is that the full effects of rate changes aren’t apparent until 12-24 months after the change takes effect.  Because of this lag in cause and effect, the Fed may already have increased rates above what was necessary to slow inflation to a standstill, and a recessionary trend may be developing.  What this means to homeowners and prospective home buyers is that currently rates for home mortgages are fairly stable, and have actually moved slightly lower in the last few months.  And interest rates on fixed rate mortgages are still very low. 

Let’s look at what these conditions mean for homeowners thinking about re-financing, new home buyers, and sellers.
Homeowners
Many homeowners have been misled by all of the news and talk about the Federal Reserve’s rate increases.  They assume that because the Fed Rate has increased by 4.25% in the last 3 years, that mortgage rates have gone up by that amount, as well.  This simply isn’t true, and many homeowners with current fixed rate mortgages at 7% or above, or who are hanging on to older adjustable rate mortgages (ARM’s) with wide spreads, could do much better by re-financing.  The fact is that back in June of 2003, when the Fed Rate was at 1%, the best available rates on mortgages were averaging 4.75-5.125%, a spread of about 4%, with fixed rate mortgages significantly higher than ARM’s.  Right now, with the Fed Rate at 5.25%, the best average rate on a mortgage is running about 6.125-6.5%, a spread of only about 1%!  No matter what your credit rating or debt situation, the average rate you could get today, versus what you would have gotten when rates were at their lowest, is only about 1% higher.  Plus, due to other economic factors such as changes in the bond market, fixed rate mortgages are actually averaging rates that are almost the same as ARM’s, making them an excellent deal for consumers.  So if all of the talk about high rates has scared you off re-financing your current mortgage, take a hard look at what your current rate really is, and contact a Licensed Mortgage Broker to find out if you can do better.
Home Buyers
As I stated in a previous article, it’s a buyers market, and that still applies.  There are real bargains to be found in housing, as more sellers tire of waiting for a sale, while watching their home’s value slowly decrease.  Plus, rates on mortgages for new purchases are usually lower than those offered for a re-finance.  Waiting for the Federal Reserve to perhaps lower rates slightly sometime next year, may mean that you miss out on buying a home at a bargain price, and the small amount you “might” save in interest,  won’t even be close to the amount you could save by buying at a lower price.  For example, if you can buy now at a 5% below market value price on a $250,000 home, financed at 100%, you would save $12,500 off the price, and finance $237,500 at 6.5%, for a payment of $1501.16 on a 30 year fixed rate mortgage.  If the Federal Reserve drops rates by .25% early next year, but the housing market gradually improves, and you have to pay full appraised value for the same home, you’d be financing $250,000 at about 6.25%, for a payment of $1539.40!  Plus you will have paid $12,500 more for the same house, and have less equity in that home for the entire time you own it. 

Home prices have fallen slightly in the last few months, but there are signs that trend is coming to an end, and no one predicts it to continue in the long term.  You only have to decide if you want to already own a home when the recovery is in full swing, or wait until then and pay more for the same house.
Sellers
Although the short term prospects for people trying to sell their home appears bleak, there are some things you can do, depending on your situation, to improve your odds of making a deal you can live with.  You basically have two options, and the first one is pretty simple.  If you have no pressing need to sell your home quickly, either pull it off the market until conditions improve, or just sit back and wait out the current situation in the housing market.  If you do decide to leave it up for sale, consider using some of the suggestions under option two.  Or, if your need to sell isn’t based on location, but instead on the size of your current home or it’s amenities, consider re-modeling or an addition to solve those problems.  You need to be careful not to improve your home to the point where you “out price” it’s value for the neighborhood its in, but in general home improvements give you a very good return on your investment.  This is especially true in the current market, when contractors need work, you can often negotiate better deals, and it is an even better deal if you can do some of the work yourself. 

On the other hand, if you really do need to sell your home as soon as possible, there are several things you can do to improve your chances of selling it quickly.  First, make sure your home is “ready to sell”.  Inexpensive repairs or upgrades can make a big difference in how buyers view your home.  Walk through and around your home with “buyers eyes”, or have a neighbor do it with you, and look for things that are negatives, that can be easily and cheaply turned into positives.

Some suggestions, if needed:

• Re-paint the exterior and interior with neutral colors.  Many realtors and others suggest yellow for the exterior and very light cream for the interior, but buyers get tired of seeing so many yellow houses with stark white interiors.  Still, keep it muted, nothing too bright or out of the ordinary.  Consider using a three color scheme for the exterior.  For example, a very light gray or tan body color, with a medium gray or brown trim color on soffits and shutters, and a dark gray or brown accent color on window ledges and the front door.  You can also do the same scheme with other colors like green or blue (but make sure they are muted, think sage green and gray-blue shades), and also consider substituing white for your trim color in any of these.  For the interior, stay very light to make your home appear larger, but consider using a darker cream color in certain rooms to make it appear warmer or cozier.  The main thing is to follow a consistent color theme from room to room.  Bathrooms and the kitchen are two areas you can consider going a little wild with paint color, just don’t over do it.
  Speaking of kitchens and bathrooms, depending on your budget, and how much of the work you can do yourself, consider adding new faucets, sinks, or complete vanities.  (Don’t forget to clean throughly around all additions!  A new faucet with a hard water ring around it doesn’t impress anyone.)  Launder or replace shower curtains, bath mats and area rugs.  Make sure bathroom accessories are minimal, look new and clean, and match.  Buy a few new, good quality towels, and put them out on towel racks for “show”.
• Edit, edit, edit!  If necessary, rent a storage locker for a few months.  You want your home to appear lived in, not cluttered.  Clear tables, cabinets, bookcases of all knickknacks and personal pictures, etc., then replace just a few, grouped together by similarity.  A good guide for most people is to leave half or less of what was there, and group the items in odd numbers, three or five for example.  Take away every canister, appliance, or anything on your kitchen counter that you can, and clean out all of your pantry, kitchen cabinets and drawers.  Sell, store or give away anything you haven’t used in the last 6 months.  Remove furniture that is seldom used to create a more spacious look.  For example, if your dining room set has 8 chairs and a leaf in the table, and 2 chairs sit on either side of your china cabinet, put the extra chairs and the leaf in storage.  If the room still seems crowded or cramped, consider putting the buffet in storage, and replace it with a narrow hall table from the cramped foyer.  Store personal items such as toothbrushes and razors out of sight in drawers or cabinets.  Speaking of drawers and cabinets, clean them and your closets out now.  It will make moving easier, and make storage appear more spacious.  Clothes and shoes that you don’t wear regularly, Christmas decorations, photo albums and scrapbooks, even about half or two-thirds of the books on your bookshelves can all be placed in storage.  Don’t forget the basement and garage.  Remove and store anything that keeps you from easily parking your car in the garage.  Paint and household chemicals, bicycles or exercise equipment (unless it is in a dedicated “workout room”), all need to go.  Consider having a yard sale to get rid of anything you don’t want to move with you, and donate the rest to charity immediately after the sale.  Then go through and see if you still have any cramped feeling areas or rooms, and edit some more.  Then have your friend or neighbor come back through and point out any problems, and edit some more.
• Clean, clean, clean!  I’ve mentioned these last two things 3 times each, not because they are very important, although they are, but because you should do each of them 3 times!  Clean your entire house from top to bottom, inside and out, with special attention to the bathrooms and kitchen.  This should include “cleaning up” your landscaping, as well.  Trim hedges and overgrown plants, trim trees (or hire someone), remove dead or sickly plants, add plants to create a theme to your landscaping, if you don’t already have one.  Mow your lawn high (it looks better), trim around it, and add fresh mulch to flower beds, around trees, etc.  Sweep or hose off side walks and the driveway, use a special cleaner to get rid of any oil stains.  Rent a pressure washer and buy cleaning solution to go with it, if you have a lot of stains to remove, and consider using concrete stain in a color that complements your homes base color, on any really rough looking driveway or walk way, after its been pressure washed.  Then go back to the inside, and clean again.  Look for areas you may have missed, cobwebs up high on a cathedral ceiling, for instance.  Shampoo your carpets, scrub grout lines, reseal or wax tile and linoleum floors, clean windows inside and out, polish mirrors, wax or oil wood furniture, vaccuum and use odor neutralizer on all fabric furniture, launder or dry clean drapes, clean blinds, etc.  Really get into every corner, knook and cranny, and make it spotless.  Clean trash cans and ashtrays, clean picture frames and polish glass, clean and degrease kitchen and bath cabinets, clean out and wipe out the refrigerator (don’t forget behind it!) and use Pledge or lemon oil, or the appropiate sealer or wax, on your counters and cabinets to make them sparkle.  Wait a day or two and rest up, then walk through and clean any ares you might have missed.  Now comes the hard part, maintain this level of cleanliness until you sell your home.  Pick up after yourself daily, vaccuum and dust often, and mop floors and polish counters, furniture and glass weekly.
• Market your home every way, every where, all of the time.
  If you are using a realtor, make sure your contract specifies that any buyer you find on your own is excluded from your broker aggreement.  Tell all of your friends, acquaintances, co-workers and anyone you meet that you are selling your home.  They may not be interested, but they may have other aquaintances that are.  If you are selling it yourself, invest in a professionally printed sign, put an ad in the newspaper, list it on free on-line services.  Consider putting an ad in the paper advertising an open house one Saturday or Sunday.  Contact a Mortgage Broker to assist your prospective buyers with their financing.  Many of the better mortgage brokers will provide you with pre-printed handouts for your open house, signs for your yard, free pre-approvals for your prospects, and some will even give you free listings on-line on their web-sites.  Some will do a walk through with you, pointing out areas you may have missed when you were repairing, editing and cleaning.  They will also do an Electronic Valuation Appraisal of your home, and give you a “real” estimate of the price you should be asking.  All at no cost to you.  Once you a Mortgage Broker lined up to assist your prospects, put “Financing and Free Pre-approvals Available” in your advertisements.  Research and use every available resource you can find to get your home in front of as many people as possible, and make your home the best looking one they have seen.
  If all else fails, and you have substantial equity in your home, consider dropping your price slightly, and advertise it as selling for below appraied value.  If a prospect wants to know why you are selling below market value, explain that you have owned the home for quite a while, have substantial equity, and can afford to sell it slightly below appraisal and still make a reasonable profit.  If you are selling it yourself, you could also explain that you are discounting the price slightly because you won’t have to pay a real estate broker fee.  Do not tell them that you are “desperate to sell” or “need to move for your job” or the “market in this neighborhood is terrible right now”, or anything else that will cause them to make an offer that is ridculously low.  Besides, these aren’t the “real reasons”, they’re just conditions that have caused you to reconsider the amount of profit you can live with.

So this is the bottom line.  If you are considering buying a house, or re-financing your current home, conditions are probably a lot better than you thought.  If you are selling your home, you will face some competiton, and demand is low, but there are still many buyers out there, and almost 110,000 homes were sold nationwide last month alone.  You just may have to work a little harder to make sure that yours is one of the ones that sell this month. 

FMI           
         

The Federal Reserve Pauses in Their Rate Hikes
Well, the two big news stories in the last few weeks were the Federal Reserve Bank’s decision to not raise rates for the first time in 3 years, and the terroist plot by Islamic extremists that was foiled in Great Britain.  How these two things are related helps explain why the rates on a 30 year fixed rate mortgage actually went up in the days following the Fed’s announcement.  Of course, the reports after the announcement that showed that inflation wasn’t slowing helped spark the bond market, which naturally drove up long term rates.  But what this phenomenon actually helped highlight is that although the Fed can influence rates, they can’t totally control them.

One of the major problems with the Federal reserve’s policy of raising rates to influence inflation is, by their own admission, that the results of rate increases aren’t fully seen in the economy until 12-18 months after the increase takes effect.  This means that the “best” rate to keep inflationary pressures at bay might be the Fed rate of a year and a half ago, and cuts in the current rate may be necessary to forestall a recession.  Although the current rates available to consumers for a new purchase or refinance are actually quite reasonable, at only 6.5-8% (remember the 80’s, when rates on mortgages ran as high as 18%!)  many people have adopted a wait and see attitude when it comes to buying a new home or refinancing their current one.  Thus, the huge drop in new home sales and starts, and the equally large increase in homes on the market versus buyers wanting to buy them.

The feeling among consumers seems to be that rate cuts are on the horizon, and the instability caused by the attempted terroist attacks also contributes to the instability that makes consumers balk at taking any type of risk.  The fact that the pressure of increased oil costs is about the only thing fueling inflation at the moment, also doesn’t help. This may lead to the Fed maintaining a higher rate than is really necessary, leading to a real estate market collapse that is both unprecedented and unwarranted.  The good news is, buyers who aren’t afraid of the current rates can really get some good deals on the home they want.  Most buyers are afraid of “paying too much in interest” at the moment, so houses are sitting on the market for months at a time.  There are bargains to be found at 10-20% below appraised value or more, and a smart buyer can take advantage of this situation.  Plus, in a year or two, if rates do gradually creep down (which is my best bet on what will happen) they can then refinance at a lower rate, and still have ten of thousands of dollars in equity.  Plus, as an added bonus,  those borrowers in an Adjustale Rate Mortgage (ARM) at the moment, should see their rates decreasing.

Another factor that influences inflation, and then effects interest rates, is the manipulation of U.S. currency by foreign governments.  Without going into too much detail, China is one of the countries currently driving up inflation in the U.S.  Every time a U.S. citizen buys a product made in China, dollars are shifted to the Chinese economy, and the trade deficit with China increases.  The Chinese investors then use those dollars to buy up U.S. Treasury bonds, which fuels inflation.

So, we have a variety of factors at work that cause changes in the interest rate you pay, and also cause inflation or recession to occur in the United states.  Changing one of those factors, as the Fed does, can influence the others, but can never stop those factors from changing in response.  Now the question is, “What can an individual do to influence how the factors that influence their day to day existence?”.  One thing each of us can do is something that was a catch phrase from 20-30 years ago, and that is to “Buy American”.  Although that is difficult to do that today, with components for the various things you might purchase being manufactured in a variety of different countries, and U.S. companies being bought out and owned by foreign conglomerates, it is a goal still worth pursuing.  It would only take a small shift in consumer buying patterns to influence both the trade deficit, and the economy in the U.S.  And when you cosider that the quality of American made products is still, by and large, excellent, the overall cost to consumers is actually negligable.

The other major factor in this equation that each of can control is oil.  Wars with, treaties and agreements entered into, sanctions imposed against, and aid and concessions given to oil producing countries are a major source of drain on the U.S. economy.  The solution to this problem is both simple and attainable.  As a country, we need to stop depending on foreign oil for our energy supplies.  Simply cut off all interaction with, commerce with, aid given to, immigration or political asylum allowed from, any country that supports or allows terrorist activity.  The benefit to the U.S. economy would be billions of dollars in scope, and those countries could no longer complain that we were intruding on their culture or way of life.  But, how could we survivie without the influx of oil from these countries?  The fact is that the technology does exist, and it is available today, not at some point in the future, but it simply isn’t being utilized by a governmet that has too many ties to maintaining the “status quo”, when it comes to the oil industry.  This technology would probably be commonplace today, except the federal government of the U.S. and the Europeon nations can’t control and tax the prodution of water, so it will cost them literally billions of dollars in revenue, when it becomes the norm.  This is the same reason that none of the auto manufacturers or power companies have embraced this technology.         
So, what can you do?  Basically, there are three things each of us can do:
1.  Take advantage of the bargains now available in the housing market.  Buying is always cheaper than renting, in the long run.
2.  Buy American whenever you can.  The few dollars more you spend will be more than made up for, in most cases, by getting a higher quality product that lasts longer.
3.  Explore and promote alternatives to an oil based society,  For more information on a technology that has been around for decades, and that would allow you to run your car, lawn mower, portable generator, etc. on water, not gas, check out the posting on another blog, http://www.upaas.com/blog.  It can be done, and it is both cheaper and safer, and virtually non-polluting.

The conclusion I’m getting to is simple.  Rates are coming down, bargains can be had, and water fueled technology is becoming available, so the future does look bright.  However, you can’t wait or hope that big corporations or the government will help you to take advantage of these opportunities, you have to take action yourself to succeed.  Check out the posting on the blog I’ve listed above, and the links to the YouTube video that actually shows this technology working in a real vehicle. Consider helping yourself, the country, and the world by spending a few dollars to convert your current car over to a water based fuel system, rather than buying a new fossil fueled vehicle.  The bonus is that you get to save the approximate cost of the retrofit each year for every year you own the car.  Check it out.

Here’s some more info about where interest rates are headed, and its not good.  Even the head of a group that critiques the Federal reserve’s policies thinks rate increases are still coming in the weeks ahead.  So if you’re buying a new home or refinancing your current home (especially if you have an ARM), now is the time to act.  Give us a call at 813-882-8878 or visit www.starmortgagebroker.com to lock in the best rate you can, before they go up even higher.

For more info, check out this article.

FMI

Well, the latest statements from Ben Bernanke and the Federal Reserve indicate that interest rates are going to continue to be pushed up by the Fed’s ongoing program of bumping the prime rate.  Stock prices were down again as Mr. Bernanke said that the economy was in a state of “transition”, and that the Fed was committed to fighting what they see as an inflationary trend. 

The point of this to you, as a homeowner, or potential home buyer, is that you need to act now, before rates get any higher.  If you wait even another 6-8 weeks to re-fi your home or purchase a home, you could be paying an extra 1/2 % or more for the life of the loan.  If you’ve been thinking about refinancing your Florida mortgage, or need a home loan to buy a home, contact us today and let us get started finding the right loan for your situation.  You’ll definitely want to lock your rate before the Federal Reserve has another couple of rate hikes in their pocket, so you can personally keep more of money in your pocket every month!

For more on the Fed’s latest announcement, see the Boston Globe story here. 

Is an Adjustable Rate Mortgage Your Best Deal?

If you’re looking for a mortgage, what kind do you need.  There are hundreds of different programs out there,  and you probably don’t want or need to become an expert on all types of mortgages.  You just need to hire a licensed professional you can trust to find the best program for you.  We’ll talk more about that later.  For right now, you can divide all mortgages up into two basic types, fixed rate mortgages and adjustable rate mortgages (ARM’s).  Although they both have their advantages, many financial experts, including former Federal Reserve Chairman Alan Greenspan, have stated that ARMs are a better deal overall.  I generally agree with them, because ARMs have saved me tens of thousands of dollars over the last 15 years.  This installment of the Top 10 Lists makes a some very good arguements about why you should be considering an ARM for your mortgage.  Right now though, an inversion in the bond market has caused rates on Fixed Rate Mortgages to be about equal to the rate on ARMs, which makes an ARM slightly less attractive.  Still, if the most recent rate hike by the Fed (under new Chairman Ben Bernanke) is their last, and rates start to fall again, an ARM would be a very good thing to have.  Here are the top ten reasons to consider getting one.   

10.  Former Federal Reserve Chairman Alan Greenspan thinks they’re a better deal, and can save you thousands.  Check out the Greenspan Article (will be publish in a later post) to see what he says about ARMs, and how banks and credit unions usually don’t have them, or if they do, they don’t recommend them.  As a result, Mr. Greenspan said “…a Fed study suggested many homeowners could have saved tens of thousands of dollars in the last decade if they had ARMs.”   Now, if rates shoot up, fixed rates are better long term, but with rates slowly rising and apparently stable, and the average person moving and refinancing every 7 years, the risks seem pretty slim.

9.  A variety of options are available, with rates fixed for 3,5 or even 7 years before the rate adjusts.  This means that you can lock in a rate slightly lower than the “fixed” rate mortgages offer for up to 5-7 years.  By that time, you may be ready to move, due to having children, getting a promotion, children grown and leaving, transfer at work, you want a pool, etc.  At this point you’ll have to sell and get a new mortgage anyway, so WHY NOT SAVE THOUSANDS OF DOLLARS BEFORE THEN? 

8.  The rate on your ARM is tied to an “indicator”, such as the Prime Rate, or Cost Of Living Index (COLI).  This means you can see what this indicator has done in the past, and keep an eye on what it is doing (usually listed in Financial section of most newspapers).  Your rate is always some amount (margin) above that indicator or index rate.  So if that index stays stable, the lender can’t raise your rate!  And you can try and pick an index that you’ve researched and are comfortable with, by choosing a mortgage that uses that index.

7.  There are even programs tied to the COSI (Cost Of Savings Index), which is based on what banks pay on savings accounts, and tends to be very stable.  Basically, banks don’t tend to increase what they pay on savings accounts very often or very much, so your rate probably won’t change very often or very much either.  Plus, if your mortgage payment is increasing, the amount you’re making on your savings account funds will be going up too.   

6.  Most ARMs have a cap on the amount your interest can increase each year, and a cap on the amount it can ever increase!  This means no matter what the index rate does, your interest (and thus your payment) can only increase a small amount each year, and there is also a limit on the amount it can increase while you have the mortgage.

5.  Usually, there is NO CAP on the amount your mortgage interest or payment can go down!  So, if the indicator drops substantially from one year to the next, your payment will drop a corresponding amount.  But if it goes up the next year, it can only rise as high as the yearly cap!

4.  There are flexible mortgage programs that allow you to pay either the 15 year or 30 year payment each month.  This means you can start out paying the larger 15 year payment, but if rates do go up substantially over several years, you can switch to the lower 30 year payment with no penalty.  This kind of payment flexibilty usually isn’t offered with Fixed Rate Mortgages.

3.  Even more flexible plans allow you to make interest only payments (or even less!) for a portion of the loan period.  Some even give you this option on a monthly basis!  You normally only have to qualify for the lowest payment option offered, and there is never a penalty or bad mark posted against your credit report for choosing to pay the lowest payment.  Although you’re not paying off any principal with an interest only mortgage, you still gain equity as your property’s value increases through appreciation.  (See previous posts for more info on this)

2.  Interest Only ARMs make it easier to qualify for a larger loan, which can mean you’re able to buy a larger, nicer house in a better neighborhood.  This helps you 2 ways.  Not only do you get the advantage of living in a nicer home in a better neighborhood while you’re there, but larger homes in better neighborhoods usually appreciate faster than smaller homes in less desirable areas, sometimes by double the amount or MORE!  This means you can accumulate equity over twice as fast, even though you aren’t paying off any principal!  The difference between a $180,000 home appreciating at 5% with a conventional mortgage, and a $200,000 house appreciating at 10% with an interest only mortgage would be an extra $13,600 in equity that you could accumulate each year!  At the same interest rate of 6% for both loans, you’d also pay about $80 LESS each month in P&I with the interest only loan on the $200,000 home, versus a standard 30 year mortgage on the $180,000 home!

1.  The rate on a Adjustable Rate Mortgage will usually be less than a similar fixed rate mortgage of the same term (say 30 years).  The average for loans from the same lender is usually about 0.5% to 1.2%, but right now its only running about .25%.  Still, even the smallest difference, plus the additional 0.5-.75% you can save by not going to a bank for your mortgage, means you can save over 1% on your total interest rate!  A 1% difference can save you over $1500.00 a year, and a total of almost $50,000 on a 30 year mortgage for $200,000!  And if the ARM rate does start to shoot up quickly and consistently, you can always cut your losses and re finance to a fixed rate mortgage.  In the meantime, why not save as much as you can, and keep your payment as low as possible.

Still, some people like the security of knowing what their payment will be every month, and rates for both types of loans are very close at the moment, so its impossible to make a definite call as to which type of loan would be best for you.  Now that you have some information and ideas, give a Licensed Mortgage Broker a call.  They’ll find your best options for each type of loan, discuss them with you, and help you make the right choice.

Florida Mortgage Information

When Will Ben Bernanke Blink?  Is the Federal Reserve’s Rate Raising Fight Against Inflation Going Too Far?

There is a lot of speculation and debate among economists about whether the Federal Reserve will raise the Fed’s short term interest rate to 5% in their meeting on Wednesday.  If they do, it will make 16 straight jumps of .25%, since it reached it’s low point of 1%.  Most people seem to feel that statements by Fed Chairman Ben Bernanke have sent mixed signals about whether or not this meeting will be the time for a pause.  Or, will they keep consistently raising rates through the rest of the year?  No one at the Fed seems willing to commit to an answer.  This is no surprise, considering the economy seems to be sending mixed signals as well, and although the risk seems small, some economists fear a pause in rate increases would trigger a rapid increase in inflation.

One problem with judging how far to go with a rate based battle against inflation is the fact that many economic indicators take months to show their full impact.  Recent decreases in retail jobs, coupled with increases in manufacturing, apparently caused a sharp jump in the average hourly wage last month.  This doesn’t appear to be an indication of true inflation, just a shift in the job market.  The increase in oil prices only fueled a small inflationary spark, but as the fuel costs filter down through all manufacturing and transportation in the next 60 days, it could cause widespread price increases.  Mr. Bernanke and the Fed have to judge whether its time to put on the brakes, but they can’t know for sure how fast they’re going.

Some economists blame the volatile changes in the Fed’s policy under Alan Greenspan from 1987 to 2006 for the inflation and recession that occurred, as well as the crash of the tech stocks, which caused huge losses in the stock market.  During that time, the Fed’s policy changed 7 times in 19 years, going back and for the between raising and lowering rates.  Several of these changes were quick and radical, and the effects, of course, were dramatic.  From the crash in 1987 to 1990, the Fed raised rates as inflation picked up. Then from 1990 to 1991, they sharply cut rates during the recession. In 1994, Greenspan overreacted to a fear of inflation by raising rates, but the inflation fear was overblown, and never materialized.  It did serve to create a very Bear market on Wall Street, however.  As a result, when rates gradually decreased, and more money was injected into the economy, a massive bubble developed in high tech, and the stock market in general, as an almost irrational exuberance caused both the Dow and the Nasdaq to soar to new levels.
 
When Greenspan quickly reversed his position and decided to quickly increase rates and curtail liquidity in 2000, the stock market collapsed and entered a three-year bear market – the Dow losing almost 50% of its value, the Nasdaq over 70%.  Later in 2000, Greenspan embarked on a road of reducing rates all the way down to 1%, what many consider an artificially low rate of interest, based on his fears of deflation leading to a recession.  Since 2003, the Fed’s current policy of raising rates has continued unchecked. 
 
One thing that is not receiving much attention in all of this is how these steady increases are effecting the bond market.  During the time that artificially low interest rates ruled, Wall Street investors bid up mortgage REITs, and other interest-sensitive investments, to astronomically high levels.  Now, under Alan Greenspan, and Benanke, the Fed has embarked on a campaign of raising rates every six weeks.  As a result, the mortgage REITs, muni bonds, and other interest-sensitive investments have come down.  

An inversion in that market has caused a change in mortgage interest rates that hasn’t been seen in over 20 years.  Right now, fixed rate mortgages, which are traditionally much higher than adjustable rate mortgages (ARMs), are basically at the same interest rate, or lower.  While this makes fixed rate home loans more attractive to both buyers and homeowners, in the long term it may prove to be a more expensive choice, if the rates on ARMs decrease.  But the problem for many homeowners is that their current ARM, which was a great deal originally, is now costing them more every month.  Even ARMs that are based on a traditionally stable index, such as the COSI (Cost of Savings Index, an average of what banks pay as savings account interest), have seen large increases in the last year.
“It’s a difficult situation to judge”, said Karen Pooley, President of Star Mortgage, Inc., in Tampa, Florida, “but right now, I’m telling my clients with ARMs that their best bet is to ride out the current increases.  In the past, ARMs have always outperformed fixed rate mortgages in the long run, but you have to be willing to live with the changes as they happen.” 

“One option I have used with a few people who were having real problems making the payment, and who had sufficient equity, is to refinance them with a fixed rate mortgage at about the same rate, plus get them some cash out.”  Ms. Pooley continued, “This allows them to skip a few payments, and gets them some extra cash on hand to help cover their new, slightly higher payment.”

Even Alan Greenspan, in a speech early in 2004, had recommended ARMs as a better deal for homeowners, and said many could have saved thousands of dollars a year over the last decade, if they had one.  But this was before the Fed’s constant increases had caused such a significant increase in the average rate on all mortgages, and especially on ARMs.  One thing Ben Bernanke and the Federal Reserve should consider in their meeting this week, is how the constant increase in rates effecting homeowners who took Alan Greenspan’s advice, and now have payments much higher than they expected.  According to industry reports, foreclosures are on the rise, and that’s an economic indicator that may be telling Mr. Bernanke and the Fed that the time to pause in their rate hikes is actually past due.      

If you don’t know you’re Credit Score, or have borderline credit, read this before you go looking for a loan.

The credit score most lenders use to determine whether or not to give you a mortgage, and what rate and terms they’ll offer you if ou do qualify, is a composite of three scores from three different credit reporting agencies. Many things contribute to how each agency scores your credit in their system. Almost everyone knows that “bad” credit, like collections on overdue accounts, or repossessions and foreclosures, will lower your score. And, of course, paying your accounts on time and having paid off accounts help raise it. Some other things are less obvious, and can effect your score in different ways. For instance, the number of open accounts, and your current balance compared to your allowed high balance on credit cards can be good or bad, depending on how each system views them. What most people don’t know, and what we’ll talk about here, is how having several banks or credit unions pull your credit, (and maybe turn you down for a loan) can really lower your credit score!

Each time a lender pulls your credit, whether they offer you a loan or not, it can lower your credit score at all three agencies by several points. What this means to you, if you don’t know your credit scores, is that you could “shop” yourself into a worse rate or even a turndown, especially if you started out just a few points above a lenders cut off for approval. If you shop around to 6 or 8 or 10 different lenders over a 10 day period, and then decide to take the first or second program you were offered, you may find that you no longer qualify for it!  Or, if you do still qualify, the rate they offer you has gone up, as your score has gone down.

If you’ve applied for a loan, and been turned down, one thing you definitely should not do is immediately go to another lender (or 4) and apply there too! Stop, and read your actual turn down letter. There should be information in it telling you why you were turned down, and where to call or write to get a free copy of your credit report. Before you apply anywhere else, get a copy of that report. All banks and credit unions have only slightly different criteria for issuing loans. If the first bank turned you down, probably any other will, especially since your credit score has likely dropped several points when the first bank pulled your credit.

Credit repair is beyond the scope (and not the focus of) this post, but briefly you should take your credit report and do the following; 

1. Check for mistakes. Accounts that aren’t yours, or collections that you have paid off still showing due. Notify all three credit burueas and the company listing the error in writing, and ask that it be fixed.
2. Find out what your score is. Usually its between 450 and 800. If its below the 620-640 range, most banks or credit unions won’t approve you for a mortgage.
3. Take care of any valid collection accounts listed on your report, (especially small ones that you can pay off easily) and asked to be informed in writing when they have upgraded your account to “paid off” with the credit burueas. Check back with them every 30 days until they do.
4. If you have credit card accounts with balances that are close to your limit (for example a $9400 balance on a card with a $10,000 limit) and other cards that are paid off, use balance transfers to move some of that debt to another card. Try to get your ratio below 65%. BUT, only do this if you can get a rate the same or lower than where you have the balance now, and only if they waive the balance transfer fee (or its low), and it won’t take your balance on the new card above 60-65% of your limit. It “feels good” to pay off a credit card, but having 4 cards with balances at 50-60% of their limit is much better for your score than having 2 cards at 95% of their limit.

All of these steps should improve your scores in the future, but you need a loan now. You could start shopping finance companies for your mortgage, but their rates are normally quite high, AND each one will pull your credit,, which will again keep lowering your score. So how do you shop for the best rates and terms for your situation, without having your credit pulled a dozen times for a dozen different lenders?

Find a fully licensed Mortgage Broker that deals with a nationwide network of lenders, and let them work to find you the best program for your credit and situation, all with just ONE credit report.

You save time and effort, and your credit stays stable, so the offer they make you will still be valid when its time to close. Yes, a Mortgage Broker will charge you a fee, but thats actually to your advantage, as we’ll explain in the next post. Subscribe to this blog now, or check back later, to find out the top ten reasons to use a Mortgage Broker to find your mortgage.

Florida Mortgage Information