| In 2004, the Federal Reserve made it | | | | mortgages (ARMs) tied to indexes that |
| clear that short-term interest rates | | | | are based on short-term interest rates. |
| would be increased at a "measured pace" | | | | This includes the 11th District Cost of |
| because of a fluctuating US Dollar, | | | | Funds, 12-Month Treasury Average (MTA), |
| unstable oil prices and an evaluation of | | | | London Inter Bank Offering Rates (LIBOR) |
| other economic indicators. In an effort | | | | and others. |
| to curb inflation, the Federal Reserve | | | | This doesn't mean that everyone with an |
| has kept its word and continued to raise | | | | adjustable mortgage is in immediate |
| rates, including one incredible streak | | | | danger. Some indexes are more volatile |
| of 17 consecutive hike announcements | | | | than others. COFI moves much slower than |
| following meetings of the FOMC. | | | | other adjustable rate indexes, while the |
| As a result of these interest rate | | | | LIBOR fluctuates with more volatility. |
| increases, millions of homeowners with | | | | But remember, when an ARM adjusts, the |
| adjustable rate mortgages will feel the | | | | new interest rate is a sum of the |
| sting of corresponding increases in | | | | borrower's fixed margin plus the current |
| their annual adjustments. Consumers with | | | | rate of the index the mortgage is tied |
| revolving debt accounts tied to the | | | | to. In addition, slower moving indexes, |
| prime rate have already felt the impact, | | | | like COFI and MTA, are still likely to |
| as the prime rate always rides 3% above | | | | reach the levels of their volatile |
| the current Fed Funds Rate. | | | | counterparts in a market where interest |
| And although an increase in the Fed | | | | rates are rapidly climbing. It may just |
| Funds Rate does have a direct impact on | | | | take them longer to do so. |
| financial markets as a whole, mortgage | | | | Consumers who foresee paying an interest |
| rates are affected rather indirectly, | | | | rate that is significantly higher may |
| and may go up or down based on the | | | | want to consider refinancing to take |
| prevailing perception investors have of | | | | advantage of the stability of a |
| current economic statistics and their | | | | fixed-rate mortgage. |
| reaction to the Federal Reserve's | | | | This is also a good time for borrowers |
| after-meeting statements. | | | | who -- due to a poor credit score -- |
| In general, when economic data indicates | | | | started out in an adjustable rate loan |
| we have a slow-down occurring in our | | | | to transition into a fixed-rate loan if |
| economy, investors tend to sell off | | | | they can. If a positive track record of |
| stocks and reallocate that money to the | | | | making mortgage payments on time and in |
| safe haven of bonds and mortgage-backed | | | | full can been established, there's a |
| securities. The purchase of | | | | very good chance the borrower may now |
| mortgage-backed securities drives | | | | qualify for a loan with a lower interest |
| interest rates down. When economic data | | | | rate. |
| indicates growth in the economy, the | | | | However, as with any decision to |
| stock market typically rallies and | | | | refinance, it is important to take the |
| mortgage-backed securities sell off to | | | | terms of the existing loan, the cost of |
| fuel that stock market rally. This | | | | the new loan, and the borrower's |
| drives mortgage interest rates up. | | | | long-term needs into consideration. A |
| Our current market reflects the reaction | | | | qualified mortgage professional should |
| of investors having read between the | | | | help weigh out the options by providing |
| lines on comments made by the Fed. This | | | | a clear assessment of available loan |
| will continue to have an affect on | | | | programs for the consumer. |
| homeowners with adjustable rate | | | | |