Bob O'Brien
Head Instructor
bobrien@mywealth.com
With the Fed’s bold moves last week, and the Treasury new plan made public yesterday in order to rid the bank of all their “toxic assets”. Is it time for you to re-finance your mortgage? Buy a Home? The Government certainly wants you to, and you should definitely be getting ready to evaluate these moves.
The Fed stated last week that it would buy $500 billion to $1.25 Trillion in Mortgage Backed Securities, and the Treasury laid out a plan yesterday where they would provide financing to investors in order to purchase these assets off the books of the banks. (Article that explains yesterdays move)
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Why are they doing this? First of all, nobody wants these assets. They are at the core of the problem in financial markets. These are the “toxic assets” that sit on the balance sheets of the banks with no buyers. No one will buy them in fear that these underlying loans will never be paid. These fears are confirmed with, high default rates and people walking away from their homes.
In addition, it helps the banks free up more capital in order for them to loan out more. It helps “unthaw’ the credit freeze, and get money in the economy circulating again. There is still a lot of credit worthy people having trouble getting credit.
Finally, it helps people re-finance and makes home purchasing more affordable. Millions of people are having trouble making their mortgage payments. (By the way if this is you or someone you know make sure they go http://makinghomeaffordable.gov/eligibility.html)
Stabilizing the real estate market is the key to stabilizing the economy and the banks. This is why keeping rates low in order to make homes affordable will help a lot. Re-financing will help make the banks profitable, keep people in their homes and give people more money to spend. These are all wins for the economy!
The Fed and Treasury are basically becoming the new Fannie Mae (FNM) and Freddie Mac (FRE) of the economy. They are becoming big players in the Mortgage Backed Securities market. And just like any market when you get a big player, a “big buyer” they will bid up the prices and therefore this will reduce the rates on the underlying product which in this case is mortgages, since they are in greater demand.
How does all this affect you? This is going to decrease mortgage rates even further and make re-financing a sensible thing to do for a lot of people. It will also make purchasing a home much more affordable as well.
Should you re-finance? With the Fed’s move last week, the 30 year mortgage is teetering right around 5% and once these purchases take place we could very easily see rates around 4.5% and perhaps even 4% in a year’s time.
Unfortunately, re-financing is not free so the old rule of thumb that most people are familiar with, still applies. If you can lower you rate by1%, re-financing will probably be worth it. If not, then the fees that you will have to pay will generally not make it worth your while.
Here are a couple of mortgage calculators that you can use in order to make certain that re-financing makes sense for you:
Should you buy a home? One thing is for certain, don’t feel pressure to buy, because of these lower rates. There are a lot of people that will tell you (mainly real estate agents) to buy when rates are low, because you will have to pay more when they go up. There can be truth to this in certain real estate markets, but not this one.
There are about 5 million more houses out there then there are people that can afford these houses at these prices. The good news that sales were up yesterday was primarily from all the short sales and foreclosures.
When real estate prices are this unaffordable, (which they are right now in most parts of the country) then real estate tends to act like a bond and has an inverse relationship to interest rate when they go up. Rates have come down, yet real estate prices have still come down as well. This is an “impulse buying tool” used to get people to buy.
In other words, if interest rates went up the prices for real estate would decrease in order to keep them near or close to the affordability rates.
Make certain you check out Ander’s great article and take our Personal Finance Course when making this big decision.
Sincerely,
Bob O’Brien
Sr. Instructor
