January 31, 2008
By SUSAN TOMPOR
FREE PRESS COLUMNIST
The Federal Reserve took another enthusiastic whack at interest rates Wednesday, slashing short-term rates by a half point to 3%. This was on top of an emergency rate cut of three-quarters of a point last week.
Why are rates falling as fast as snowflakes in January?
"This is aggressive risk management," said Diane Swonk, chief economist for Mesirow Financial in Chicago.
The Fed is out to skirt the first U.S. recession since 2001. After Wednesday's cut, banks lowered the prime rate to 6%. Many consumers will see lower rates for some credit cards, car loans and other consumer loans.
Some fortunate homeowners are saving money by joining the refinancing boom, too.
Chuck Hixson had been looking into refinancing into a fixed 30-year mortgage, but he moved fast the minute he heard news on the radio about the dramatic rate cut by the Fed on Jan. 22.
"I heard it driving to work, and it was like, 'Today's the day,' " said Hixson, 52, who has a 2,500-square-foot home in Farmington Hills.
The 30-year fixed mortgage rate is not directly tied to action by the Federal Reserve. But long-term interest rates have fallen dramatically on recession fears.
Nationwide, the average 30-year fixed mortgage rate hit 5.88% this week, down from 6.71% as of Aug. 1, according to Bankrate.com.
The 30-year rate edged up some from last week's level of 5.57% nationwide.
Anytime the 30-year mortgage rate gets below 6%, consumers take notice.
Hixson, who bought the house in 1985, was able to take his existing home equity line of credit with a rate of 6.5% and refinance it into a 30-year fixed mortgage at 5.625%.
"I was kind of shocked that it was that cheap when I looked into it," Hixson said. He ended up talking two friends into refinancing, too.
This week, the Mortgage Bankers Association reported that its refinancing index was at the highest point since July 2003. Activity remains below those 2003 levels, however.
When homeowners are able to refinance to lower rates, it frees up cash to spend on other goods.
And even in this struggling housing market, there are still some consumers who may be able to take cash out of their homes for remodeling or other big-ticket purchases
"For the overall economy, it's unquestionably a healthy development," said Dana Johnson, chief economist for Comerica Inc.
"Whether it's enough to avoid a recession remains to be seen," Johnson said.
Officially, we are not in a recession nationwide. But the Federal Reserve has launched the fastest round of rate cuts since 1990 to overcome the widespread troubles in housing and credit markets and stop the economic slump that has hit Michigan and the industrial heartland from spreading.
Wednesday's rate cut is the fifth since September. The federal funds rate -- the rate that's used when banks lend one another money overnight -- was 5.25% last summer.
If you're looking for a silver lining, and we've got a lot of clouds here, it is that lower rates give life to economic growth.
In some cases, lower rates can prevent foreclosures. Adjustable-rate mortgages won't soar as high as they would have this spring. That helps many homeowners who had ARMs but have bad credit, too. Often those with bad credit histories can't just refinance to lower rates.
On Wednesday, we learned that U.S. economic growth slowed to an annual rate of 0.6% in October through December, far below forecasts. The annual rate was 4.9% in the third quarter.
Given today's troubles, it is essential to note that refinancing won't help everyone.
"The dilemma is that the 30-year fixed interest rate could go to zero, and there are still some people who couldn't take advantage of it," said Bob Walters, chief economist for Quicken Loans and Rock Financial in Livonia.
In Michigan, falling home values in many areas make it far tougher for people to get equity out of their homes and refinance. Others who have lost jobs will have a tough time finding a lender willing to refinance.
"The borrowers in the driver's seat are those with good credit, proof of income and either money for a down payment or equity in the existing home," said Greg McBride, senior analyst for Bankrate.com.
"If you're missing any of those three pieces, you have some big hurdles to getting approved for a refinance."
No one, obviously, knows how low mortgage rates can go this time around.
Swonk expects the Federal Reserve to cut rates again at its next meeting March 20-21.
Long-term rates, though, could even edge upward, if the U.S. economy picks up steam, thanks to rate cuts and a likely-to-be-passed stimulus package out of Washington.
So it may be wise to look into refinancing now -- especially if you have an adjustable rate mortgage and want to lock in a low fixed rate.
"If you've got a mortgage that can do it, take advantage of it," Swonk said.
"Sleep at night."
By SUSAN TOMPOR
FREE PRESS COLUMNIST
The Federal Reserve took another enthusiastic whack at interest rates Wednesday, slashing short-term rates by a half point to 3%. This was on top of an emergency rate cut of three-quarters of a point last week.
Why are rates falling as fast as snowflakes in January?
"This is aggressive risk management," said Diane Swonk, chief economist for Mesirow Financial in Chicago.
The Fed is out to skirt the first U.S. recession since 2001. After Wednesday's cut, banks lowered the prime rate to 6%. Many consumers will see lower rates for some credit cards, car loans and other consumer loans.
Some fortunate homeowners are saving money by joining the refinancing boom, too.
Chuck Hixson had been looking into refinancing into a fixed 30-year mortgage, but he moved fast the minute he heard news on the radio about the dramatic rate cut by the Fed on Jan. 22.
"I heard it driving to work, and it was like, 'Today's the day,' " said Hixson, 52, who has a 2,500-square-foot home in Farmington Hills.
The 30-year fixed mortgage rate is not directly tied to action by the Federal Reserve. But long-term interest rates have fallen dramatically on recession fears.
Nationwide, the average 30-year fixed mortgage rate hit 5.88% this week, down from 6.71% as of Aug. 1, according to Bankrate.com.
The 30-year rate edged up some from last week's level of 5.57% nationwide.
Anytime the 30-year mortgage rate gets below 6%, consumers take notice.
Hixson, who bought the house in 1985, was able to take his existing home equity line of credit with a rate of 6.5% and refinance it into a 30-year fixed mortgage at 5.625%.
"I was kind of shocked that it was that cheap when I looked into it," Hixson said. He ended up talking two friends into refinancing, too.
This week, the Mortgage Bankers Association reported that its refinancing index was at the highest point since July 2003. Activity remains below those 2003 levels, however.
When homeowners are able to refinance to lower rates, it frees up cash to spend on other goods.
And even in this struggling housing market, there are still some consumers who may be able to take cash out of their homes for remodeling or other big-ticket purchases
"For the overall economy, it's unquestionably a healthy development," said Dana Johnson, chief economist for Comerica Inc.
"Whether it's enough to avoid a recession remains to be seen," Johnson said.
Officially, we are not in a recession nationwide. But the Federal Reserve has launched the fastest round of rate cuts since 1990 to overcome the widespread troubles in housing and credit markets and stop the economic slump that has hit Michigan and the industrial heartland from spreading.
Wednesday's rate cut is the fifth since September. The federal funds rate -- the rate that's used when banks lend one another money overnight -- was 5.25% last summer.
If you're looking for a silver lining, and we've got a lot of clouds here, it is that lower rates give life to economic growth.
In some cases, lower rates can prevent foreclosures. Adjustable-rate mortgages won't soar as high as they would have this spring. That helps many homeowners who had ARMs but have bad credit, too. Often those with bad credit histories can't just refinance to lower rates.
On Wednesday, we learned that U.S. economic growth slowed to an annual rate of 0.6% in October through December, far below forecasts. The annual rate was 4.9% in the third quarter.
Given today's troubles, it is essential to note that refinancing won't help everyone.
"The dilemma is that the 30-year fixed interest rate could go to zero, and there are still some people who couldn't take advantage of it," said Bob Walters, chief economist for Quicken Loans and Rock Financial in Livonia.
In Michigan, falling home values in many areas make it far tougher for people to get equity out of their homes and refinance. Others who have lost jobs will have a tough time finding a lender willing to refinance.
"The borrowers in the driver's seat are those with good credit, proof of income and either money for a down payment or equity in the existing home," said Greg McBride, senior analyst for Bankrate.com.
"If you're missing any of those three pieces, you have some big hurdles to getting approved for a refinance."
No one, obviously, knows how low mortgage rates can go this time around.
Swonk expects the Federal Reserve to cut rates again at its next meeting March 20-21.
Long-term rates, though, could even edge upward, if the U.S. economy picks up steam, thanks to rate cuts and a likely-to-be-passed stimulus package out of Washington.
So it may be wise to look into refinancing now -- especially if you have an adjustable rate mortgage and want to lock in a low fixed rate.
"If you've got a mortgage that can do it, take advantage of it," Swonk said.
"Sleep at night."
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