Short-term Interest Rates on the Rise

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