Gaurav Bhola, MSM, Managing Editor
As the housing market tries to find its footing, the mortgage rates have eased. The lowering of mortgage home loan rates seems to be a response to the Federal Reserve's (Fed) decision to cut interest rates recently. The Fed gave the home buying and mortgage markets much needed respite by cutting short-term interest rates for the second time in two months.
The Fed's rate cut by a quarter-point to 4.5% was an attempt to forestall the existing apprehensions in the housing, mortgage loan, and credit markets trickling over to the larger economy and dipping the US into recession.
Currently, Wall Street is anticipating a housing correction in the near future, as the home market hasn't reached the bottom. The Fed is anticipating a slowdown of the economy next year, hence is attempting to steer the economy clear of a possible recession next year. It is using monetary policy to do it.
Monetary policy is a central bank tool used for either an expansionary policy or a contractionary policy. Expansionary policy is an attempt by the Fed to tackle unemployment in a recession by lowering interest rates. The Fed funds rate is lowered leading to an increase in the total supply of money in the economy.
Alternatively, a contractionary policy is used by the Fed to tackle inflation by raising interest rates. The Fed funds rate is increased leading to a decrease in the total supply of money in the economy, thus cooling an overheated economy.
The interest rate cut may provide the economy a much needed boost to uplift the sagging morale of business, Wall Street, investors, and consumers. However, the lowered home mortgage rates may provide the need impetus to home buyers on the sidelines to jump at the opportunity to buy a home.
Despite the warnings of further economic corrections, the economy has been resilient thus far, even with the subprime mortgages fiasco, foreclosures, lowering of residential real estate prices, increase in food costs, and oil prices approaching $100 a barrel.
But the rates for adjustable rate mortgages (ARMs) fell following the Central Bank's interest rate cuts. According to Freddie Mac, the five-year adjustable-rate mortgages averaged 5.89 percent, down from an average of 6.08 percent, a year ago.
While one-year ARMs averaged 5.50 percent, a decrease from 5.55 percent last year. Also, the rates on 15-year fixed-rate home loans averaged 5.90 percent; last year, the 15-year rate averaged 6.04 percent.
The rate cuts provide a great opportunity to potential home buyers to strike while the iron is hot with great low mortgage rates. In addition, it the perfect time to convert ARMs and interest only mortgages to low fixed rate mortgages.
