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Will The Interest Rate Cut Help You?

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By GARY PINNELL

Highlands Today

Published: December 18, 2008

The Fed lowered the interest rate Tuesday, from 1 percent to between zero and 0.25 percent.

So what does that mean to us?

Actually, if you're ready to buy house, or if you have an Adjustable Rate Mortgage, it's a welcome bit of news.

"It's already had an effect on long-term mortgage interest rates," said Jack Madder, senior vice president of residential lending for Riverside Bank. The 30-year fixed rate was 5.25 on Tuesday.

By Wednesday, Bank of America and Wachovia also had lowered their prime lending rate from 4 percent to 3.25 percent.

"It's down a half-point from yesterday," said Madder.

Since the federal government's $700 billion bailout of financial institutions, there have been complaints that they've simply banked the money, and not loaned it to ordinary Joes.

On Tuesday, the Federal Reserve Bank acted more like Santa Claus than Scrooge, making sure the most desperate homeowners got help.

"I think it's fabulous," said Dale Stewart, a real estate agent with C.S. Edward Realty. "People are already buying houses, because prices have dropped so low because of the foreclosures. This will open it up a lot more. I'm excited. I'm thrilled."

Madder's advice: When loan rates are zig-zagging up and down, lock-in a finance rate with the bank. But experts are predicting even lower 30-year mortgage rates in the next few months - maybe even below 4 percent.

"It's certainly possible," Madder said. "So I wouldn't be in a rush to lock in my personal loan."

However, he said, mortgage interest rates may be at historic lows. Now is the time to reduce outside debt, speak with financial counselors, and beg in-laws for the down payment to buy a house.

"You can buy a decent house for $125,000," Madder said. "At 4.5 percent, it's cheaper than a lot of people are paying in rent."

ARMed And Dangerous

Five years ago, at the height of the real estate boom, some buyers signed Adjustable Rate Mortgages at promotional rates as low as 4 percent. Some of those rates have doubled to 8 percent, and some could triple to 12 percent in the coming months.

"Likely, the ARM goes down," said Madder. "They were going to be coming up on an adjustment period. Now a lot could be adjusted downwards."

Homeowners paying an adjustable rate mortgage that's expiring should be the first in line to refinance, according to University of Indianapolis economist Matt Will.

"If you're on an ARM, you're gonna get a good deal," said Will to WTHR.com

"If you're not on an ARM, if you're on a fixed rate, this will have no benefit," Will said. A homeowner who isn't paying a full point above the current rate may not want to refinance because of the fees.

"I think anybody who intends to stay in their home a couple years, who has a rate north of 6 percent, would clearly benefit from rates today," said Reagan Rick, M&I Bank president.

More good news: generally lower rates will lower car loans, business loans, even credit card finance rates.

Bad News

Lower interest rates may create a refinance wave, Madder said.

However, all that great news doesn't help everybody.

After the economy went south in 2007, credit standards were tightened, Madder said.

"We used to could do 100 percent financing," said Madder, the Fort Pierce mortgage banker. These days, a 10 percent down payment is typically needed, or $10,000 on a $100,000 loan.

The news may not help people waiting to refinance, Madder said. The value of their home may be lower than the balance of the mortgage.

"Your property values need to support the new loan," Madder said.

What 1/2% Drop In Interest Rates Means

Effect on a $100,000, 30-year, fixed interest loan, principal and interest

5.25% = $552/ a month

4.75% = $521/ a month

Savings = $31 per month

Source: Riverside Bank

Reporter Gary Pinnell can be reached at 863-386-5828 or gpinnell@highlandstoday.com.

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