Fed Rate Cut to 3.50% Bails Out ARM Borrowers

(January 23rd, 2008)

Homeowners whose Adjustible Rate Mortgages (ARMs) are set to reset this year will experience the biggest benefits of the Fed's surprise 75 basis points rate cut on January 22nd, 2008. This is because as the Fed cuts rates, mortgages will become cheaper to borrow. As many as 2 million homeowners face resetting ARMs this year and lower interest rates mean they will get less shock of higher payments, and may actually be able to still afford keeping their homes and their mortgages. Lower interest rates also allow ARM borrowers to qualify for mortgage refinancing.

On Tuesday January 22nd, 2008, the Fed made a surprise 75 basis points rate cut that decreased the central bank's key lending rate from 4.25% to 3.5%. This was the most agressive rate cut in 20 years because the Fed realizes credit in America is at a very dangerous stage. Bernard Baumohl, MD of Economic Group Outlook quotes, "Whenever you lower rates, it can't hurt the consumer. The Fed never promised it could change things dramatically overnight. There's a certain timeline with a cut in rates of nine months to 18 months when the economy feels the benefits."

Is this rate cut really going to help the 2 million homeowners who face resetting rates this year? Dave Loyst, VP of Retail Lending at Bear Stearns quotes, "Mortgage rates already have fallen and they still are falling. Every deal is a struggle, but we're still doing loans. I think this rate cut absolutely is going to help the real estate market."

He adds, "This definitely will help the mortgage situation. With rates falling, more people are able to qualify for refinancing and more people who were left out from buying homes before will be able to do so now."

How Much Cheaper is the Mortgage?

Consider a 5-1 Adjustible Rate mortgage of $350,000 with a 6.52% interest rate as of Oct 7th, 2007 (assuming a 20% down payment). The rate for that loan was 5.04% this week starting January 21st, 2008. That translates in to a whopping $5100 savings in annual mortgage payments! That would save a typical family:

This rate cut is also very good for the long term. Mr. Loyst thinks mortgage has been made 'affordable' for the average American family with this rate cut. Investors and home buyers who have been shunning the real estate market for the last 8 - 9 months will come back in the market looking to buy. He quotes, "People will come out looking to buy houses...and it will help slow down the depreciation of real estate (values) in certain areas."

Homeowners looking to refinancing their mortgages or new first time home buyers will meet tightening lending standards by banks. Experts suggest that you keep a credit score of at least 650 before you apply for these loans. With the $1.8 trillion in sub prime mortgage debt that investment and other banks are writing down, it is expected that banks will tighten their lending standards in order to minimize their losses.

Opportunity for People with Good Credit

Doug Duncan, chief economist at Mortgage Bankers Association quotes, "If you are a high-quality credit household and you're looking to buy a house, prices have fallen in many markets. In addition to that, interest rates have come down." Declining home prices and lower interest rates make up for the best of both worlds for home buyers looking to purchase their first home or refinance their current mortgages. "Anybody who is looking to purchase a home right now is finding that they have the best of both worlds. They can have the steal of the century as far as what they pay for the house and also, they can finance it at decade-lows of interest rates."