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Fed Rate Cut Signals Cheaper Home Loans & Mortgage Refinance

Mar 28, 2008
The Federal Reserves latest cut in its prime rate by three-quarters of a percentage point may do little to assist home owners across the country who have built in fixed rate mortgages. It will however add stimulus to first time borrowers as interest rates start to reflect in some of the lowest mortgage rate products for several years. The reduction in the prime rate which now stands at 2.25% will also put further pressure on the dollar, weakening it against the major world currencies specifically the Euro, which has been gaining in strength almost as quickly as the dollar has been falling.

There are several repercussions to a weaker dollar, not least the resulting rise in the price of oil. US households already struggling with higher gas prices have been economizing in their spending patterns. It is this cutting back that has fueled speculation that the US economy is heading into a recession. A recession, that many believe has already arrived. But with the definition of a recession being at least two concurrent quarters of negative growth and the last figures released for the final quarter of 2007 showing 0.6% growth, it may be more realistic to paraphrase Mark Twain, that in relation to the economy, " Reports of its death may have been over-exaggerated". The dramatic fall in growth from 4.9% in the previous quarter cannot however be ignored, and if the downward trend continues at the same rate, then a recession may be declared by mid-June.

To rescue the economy, or for the cynically minded, to rescue the republican candidate, John McCain in Novembers election, a stimulus package including up to an $800 tax rebate will take effect in April. The package is supposed to boost consumer spending but the overall effect maybe solely to allow the administration the breathing space it needs to delay announcing that the economy, has in fact gone into recession. The influx of $1.5 trillion dollars into the economy should be enough to keep the statistics in the positive for at least a quarter leaving room for the administration to declare that by definition, the country is not suffering from the big R.

Like most things though, with every economic cycle there will be winners as well as losers. Whilst many of us whine about higher gas prices, food prices and energy costs, the lowest interest rates for nearly a generation will allow some to enter the housing market at a time when locking in their finance may stand them in good stead for the next twenty years.

When Donald Trump is quoted as saying that there are plenty of excellent investment opportunities available in the current real estate market, it is worth taking note. This aside, homeowners who can afford to, may also be attracted into the mortgage refinance market. With interest rates so low, the closing costs of refinancing a home loan in relation to the long term benefits of a fixed home loan at such low rates, now makes refinancing a serious option.

The problem that you may still have to be overcome in refinancing your mortgage is finding a suitable lender willing to loan money depending on your credit status. Mortgage lenders who have been seriously hurt by the sub-prime crisis and are finding it increasingly difficult to raise funds on the secondary market leaving less funds available to lend as mortgage finance. The result of this being, lenders have tightened the criteria for loans. Funds have been so scarce that the Federal Reserve has had to inject billions of dollars into the system just to keep the cash flowing around the market. This liquidity issue means that whilst interest rates may be favorable, finding the funds to borrow may need some serious leg work.

Whatever your circumstances, the economic road ahead may be rocky. If you are able to find cheap mortgage finance or refinance and take advantage of the current situation whilst interest rates are low, you may just emerge down that road in a stronger position.

In todays uncertain times, that would be a good result by any standard.
About the Author
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