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