Edina MN Mortgage Broker Financing The Twin Cities and Greater Minnesota-Venture Development Inc

Short-Term Interest Rates on the Rise Adjustable Rate Mortgage Holders Prepare for Increase in Interest Rates
By Patti Mazzara MMS, Vice President

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

WITH FIXED RATES COMING DOWN RECENTLY, NOW WOULD BE AN EXCELLENT TIME TO RESET YOUR ARM TO A FIXED RATE MORTGAGE.

Payments Increase for Millions with ARMsA Farewell to ARMs: Refinance Before Adjustable Rate Mortgages Reset
By Patti Mazzara, Vice President

Venture Development Inc. Edina, MN – Since June of 2004, the Federal Reserve has systematically increased the federal funds rate, causing short-term interest rates to follow suit. As a result, consumers with Adjustable Rate Mortgages (ARMs) tied to volatile short-term rate indices, such as the LIBOR, are finding themselves at the mercy of the Federal Reserve’s war on inflation. “Higher interest rates function as a tax on people who hold variable debt,” says Daniel Gross, reporter for The New York Times, a “truism that is particularly apparent to homeowners holding adjustable rate mortgages.” In his article, Gross cites Mark Zandi, chief economist at Moody’s Economy.com, who estimates that nearly $2 trillion in ARMs are due to reset by the end of calendar year 2008. This could potentially increase the total interest payments of ARM holders by an estimated $50 billion in 2009, compared to today. For many of these borrowers, reset minimum monthly payments could increase upwards of 50% to even 100% of what they’re paying now – if they haven’t already. And the worst may not even be over! According to Ben Bernanke, the Federal Reserve’s chairman, the real estate market is experiencing a “substantial correction”. This, economists say, is the result of the Fed’s attempt to engineer a “soft landing” by systematically increasing interest rates to control inflation without fueling a recession. Fed officials believe that they are making strong progress towards this difficult goal. However, even moderate economic growth will give the Fed room to increase short-term rates further, according to David Leonhardt of The New York Times. This means more bad news for ARMs holders with life-caps at 10% or more, and even worse news for the estimated 70% of Option ARM borrowers who chose the minimum or negative payment options of their mortgages and are now actually accruing (and compounding) a larger balance than what they originally borrowed. If you or someone you know has an ARM, however, all is not completely lost. There is still time to take advantage of alternative loan programs, such as intermediate fixed-rate and tiered-rate loans, that can effectively limit one’s liability before rates increase again. These programs enable borrowers to stabilize their finances and know exactly what their monthly payments will be over the next few years while the Fed does its best to stifle inflation. Remember, the Fed has a habit of overcorrecting the market before changing policies, which means rates could still increase even after their goal of a soft landing has been reached.  If you do foresee a sustained period of paying an interest rate that is significantly higher than what you want or are able to pay, see your mortgage professional today. Don’t be a casualty of the Fed’s war against inflation. Ask about intermediate fixed-rate or tiered-rate products to hold you over until the Fed flips the script and rates finally begin to decrease.   An experienced and resourceful loan professional will have access to a variety of loan programs including 3, 5 , or 7-year fixed-rate products as well as tiered-rate programs to counter fully-indexed ARMs and Option ARMs. A 5-year fixed rate mortgage, for instance, converts to an adjustable at the end of that fixed tenure. Taking out such a loan, with no prepayment penalty, may make a lot of sense right now because it will provide some interest rate relief in today's market, while buying the consumer time to refinance once rates begin to decrease.  
Tiered-rate products, on the other hand, are essentially fixed-rate loans that act like adjustable rate loans but offer the security of a built-in cap. In fact, these loans actually adjust in your favor, saving you money in the first years of the loan before reaching their final fixed rate. Various types of these tiered-rate products exist, and each offer different money-saving options. See your mortgage professional for the one that’s right for you. Just be sure, however, that he or she caps you out at a rate that’s lower than your current interest rate to receive the full benefit of these products. Finally, confirm that your mortgage professional will be keeping abreast of market conditions and will be ready to refinance you once rates do decrease, saving you even more. 

RESET YOUR ARM NOW!!!  CONVERT THE ARM TO A FIXED RATE MORTGAGE WHILE THE INTEREST RATES ARE LOW.