Low Rates Warrant Assessing Mortgage Needs by Broderick Perkins
With mortgage rates at their lowest levels this year and the Federal Reserve unlikely to raise benchmark rates soon, mortgage rates could drop even further -- perhaps to 7.5 percent or less. With some home prices escalating faster rate than mortgage costs are falling, however, experts are warning consumers not to gamble with what's likely their most valuable asset. "With real estate prices high in many real estate markets, due to the long-term health of the economy, don't expect any great buying opportunities," said personal finance counselor Eric Tyson, co-author of "Home Buying for Dummies" and "Mortgages for Dummies" (both IDG Books, $16.99). Bank Rate Monitor on Aug. 17 reported an average interest rate of 7.70 percent on 30-year loans and the 15-year rate lower at 7.48 percent due to reduced inflationary fears. Bank Rate says rates should remain stable through September giving consumers some breathing room to shop around and lock in good deals on fixed rates. That's especially good news for consumers who purchased homes with near record-low adjustable rate mortgages a year or two ago, but would like to stay put long enough for the savings to pay off the cost of refinancing. Refinance candidates Consumers holding those ARMs are now feeling the pinch from Fed rate hikes earlier this year which caused many ARMs to adjust up by a hundred dollars a month or more. "Currently, short-term interest rates (which drive the rates on ARMs) are higher than long-term interest rates which drive fixed rate loans, so those planning on staying in their homes longer-term should seriously consider fixed-rate loans," Tyson said. By most assumptions, the Fed isn't likely to raise rates soon. That's because of a tamer Consumer Price Index, one of the most watched economic indicators, one that figures prominently in the Fed's monetary policy. On Aug. 16, the Bureau of Labor Statistics said the index increased only 0.2 percent in July, after increase 0.6 percent in June. When inflation appears out of control, the Fed prescribes higher interest rates as an antidote. Higher rates cool excessive demand by making financing more costly for consumers and businesses. The CPI was the last major economic report released before the Fed's Aug. 22 meeting. Investors and economists expect the Fed to forgo raising rates just as the central bank left the fed fund rate at 6.5 percent at its last meeting in June. Consumers buying homes, refinancing mortgages or tapping home equity should take a hard look at the possibilities now. "Majestic advises home buyers and homeowners to take the savings now, because the market is unpredictable. It looks like we may get a break in rates, but a surge in consumer spending or the economy can turn that around quickly," said Tom Ward, president of Mundelein, IL-based Majestic Mortgage Corp. "Toss out the old rule of thumb that you need a 2 percent decline in rates to make refinancing affordable. Instead, focus on the payment savings and look for no-cost refinancing -- a possibility for people with interest rates in the low 8's or higher," Ward added. Contrarians On the flip side, while waiting for lower rates could be a risky gamble, some say the election year could make the wait worth the bet. "I expect the markets to do better after the Democratic Convention. Once the interest rate and inflation jitters are removed, we should see a rally. Traditionally, we see better markets in presidential election years starting in July. During election years when the incumbent is not running for re-election, the party in power tends to stay in power only when the Dow Jones is up by Election Day? People vote their pocketbook more often than not," said Phil Hartung branch manager at Partners Mortgage in San Jose, CA. Mortgage rate considerations aside, home owners' growing equity makes now a good time to at least reassess financial needs. A fixed-rate home equity loan now could prove to be a smart move months down the road if rates do rise. "Recent increases in property values represent a significant opportunity for many homeowners to consolidate debt or make home improvements during this window that has been opened," said Hartung. | 
