Tulsa World: Mortgage-payers can benefit from Fed rate cuts

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Mortgage-payers can benefit from Fed rate cuts

By PHIL MULKINS World Action Line Editor
Published: 11/4/2008 2:13 AM
Last Modified: 11/4/2008 4:17 AM

Dear Action Line: What does it mean for home buyers when the Federal Reserve "cuts rates?" Does this mean one type of mortgage will be better than another? — D.H., Bixby.

The Bankrate Web site says the Fed's Wednesday half-point "federal funds target rate" cut will not directly affect mortgage rates. Federal Reserve actions change the federal funds rate, which is not directly tied to mortgage rates. Its Federal Open Market Committee lowered its target for the federal funds rate by half a percentage point to 1 percent — the "overnight federal funds rate" or the price banks charge among themselves in the trade of reserves.

Bankrate: Bankrate Inc., tulsaworld.com/Bankrate , says it is "the Web's leading aggregator of financial rate information," with unique depth and breadth in its rate data research. It surveys 4,800 financial institutions in all states "to provide clear, objective and unbiased rates to consumers." Its Web site offers free rate information on 300 financial products: mortgages, credit cards, new and used auto loans, money market accounts, certificates of deposit, checking and ATM fees, home equity loans and online banking.

Fear the fear: This economic crisis has frightened everyone — many seeing their 401(k)s drop 50 percent and their investments 40 percent. Everyone has stopped buying — everything but food and gasoline. The same fear discourages homebuyers from shopping for them, even though the low interest rates

and falling home prices translate into bargains galore. Bankrate looked at five financial categories: mortgages, home equity loans, auto loans, credit cards and certificates of deposit (tulsaworld.com/FedCutFX).

COFI mortgages: The winners are homeowners with ARMs tied to the COFI ("cost-of-funds-index," a yield index based on the cost of funds to savings and loan institutions in the San Francisco Federal Home Loan Bank District — an index commonly used to set adjustable rate mortgage rates) and Treasury indexes. Recently, ARMs have gotten the blame for the foreclosure-related financial crisis, but many economists say that criticism is "somewhat unfair" — that ARMs remain a worthy option for homeowners who expect to remain in their homes for less than a decade and are looking for lower interest rates.

Libor mortgages: The losers are homeowners with ARMs tied to the Libor index — the London Interbank Offered Rate index. Libor rates track the federal funds rate; when the Federal Reserve cuts rates it sends Libor rates, and homeowner mortgage payments, lower. The difference between Libor and the Fed rate has widened recently, as occurs in economic crises, and homeowners with Libor-ARMs should not expect their payment to drop as a result of the Fed rate cut, warns Bankrate.

Fixed-rate mortgages: Fixed-rate mortgages are not the spectacular deals they were in January, when rates fell as low as 5.57 percent, but rates still remain low by historical standards. As a result, fixed-rate mortgages remain a good deal for people who expect to remain in their homes for many years to come. Fixed-rate mortgages are tied to the 10-year Treasury or other long-term government bond yields. As a result, these mortgages are more sensitive to changes in overall economic outlook than to Fed rate changes.

Submit Action Line questions by calling 699-8888 or by e-mailing phil.mulkins@TulsaWorld.com or by U.S. mailing it to Tulsa World Consumer, PO Box 1770, Tulsa OK 74102-1770.

By PHIL MULKINS World Action Line Editor

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