Fed’s emergency rate cuts affect mortgages — here’s how you can benefit now

What Does the Fed Rate Cut Mean for Real Estate Investors?

Fed’s emergency rate cuts affect mortgages — here’s how you can benefit now

On Sunday, March 15, 2020, the Federal Reserve (the Fed) announced an emergency rate cut, lowering the Federal interest rate to between 0% and .25%. This sudden reduction in the Federal interest rate is an attempt to counteract the slowing of the economy, which recently came to a halt in an effort to stop the continued spread of the coronavirus.

This abrupt change in rates leaves consumers and real estate investors wondering how it will affect them.

The role of the Federal Reserve and Fed interest rate

Before you can understand how this rate cut will impact real estate investors in particular, you have to first understand what the Federal Reserve does.

The job of the Federal Open Market Committee (FOMC) is to establish policies that help govern and regulate the economy, including inflation rates, the supply of money, and economic growth and expansion, and define the cost of credit through the Federal rate.

The Federal base rate defines the cost for short-term borrowing in the financial market, particularly for banks and financial institutions borrowing and lending money to each other.

Ideally, a low Federal fund rate should promote financial institutions to continue operating as usual, borrowing and lending money freely.

It also should have a positive effect on the bond market, specifically 10-year Treasury bonds, which recently reached never before seen lows.

While the Federal interest rate does not define mortgage rates, it does impact them. Whether you're a real estate investor with a current mortgage or looking to get one, here's how the rate cut will affect you.

How the rate cut will affect new mortgages

Interest rates are still near historic lows overall, but over the past week mortgage rates have actually increased despite the Fed lowering the Federal interest rate to nearly 0%.

That's because the mortgage market doesn't mimic or match the Federal base rate but closely relates to Treasury yields, which saw a recent surge after the Fed announced their plan for quantitative easing.

Those seeking a new mortgage can lock in a relatively low rate now or wait it out to see whether rates will lower in the coming weeks as mortgage applications slow and the true effects of the coronavirus are better understood.

How the rate cut will affect refinancing

Since the Federal rate cut was announced, applications to refinance rose 4% in just one week's time. The surge in new refinance applications has been another factor motivating banks to increase mortgage rates slightly for the time being.

Refinancing at the current rates may make sense for real estate investors with higher interest rate loans; however, the cost and fees associated with a formal refinance may not justify it. Lenders and banks seem very receptive and understanding of the current crisis and are open to working with borrowers to reduce the lihood of defaults in the future.

Right now may be a good time to reach out to your lender to see if there is an alternative option outside of a formal refinance to lower your current loan rate.

Rob Arnold, a real estate investor and broker at Sand Dollar Realty in Central Florida, contacted his bank this past week, and after talking with his lender, they agreed to rewrite the loan terms on two of his rental properties to a fixed rate of 4%.

This helped him avoid having to pay closing costs or loan origination fees while securing a much lower rate than his original mortgage.

How the rate cut will affect ARM and HELOC mortgages

Adjustable-rate mortgages (ARM) and home equity lines of credit (HELOCs) will see a slightly lower interest rate immediately because they are tied to the prime rate, which is directly related to the Federal fund rate. So when the Fed rate is lowered, any borrowers with an ARM or HELOC mortgage should see some savings.

How the rate cut will affect real estate prices and returns

Typically, the lower the interest rate the more incentive there is to borrow money, thus promoting purchasing and spending. This would normally stimulate an economy and promote buying, pushing real estate prices higher. However, today's crisis and the outcome of the Fed rate cut may not produce a normal outcome.

Things are still very uncertain in the market. Each day is bringing new policies and changes to the financial market and operation of the economy. While the Fed's emergency cut desires to stimulate the economy, real estate activity has slowed in many places, and the number of default rates on investment properties, loans, rent, and mortgages is still unknown.

Only time will tell how this will play out in the long run, but for now, it's ly we'll continue to see mortgage rates stay around or just below 4%, and we'll see a relatively flat real estate market.

Over the next few weeks and months, it's ly mortgage rates will go lower. However, if defaults increase and banks become strapped for money, we could see an increase in mortgage rates as a means to try and recoup their losses.

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Источник: https://www.fool.com/millionacres/real-estate-market/articles/what-does-fed-rate-cut-mean-real-estate-investors/

Fed’s emergency rate cuts affect mortgages — here’s how you can benefit now

Fed’s emergency rate cuts affect mortgages — here’s how you can benefit now

In March, the Fed issued emergency rate cuts on loans. The spread of COVID-19 and subsequent restrictions at the federal, state, and local level, have taken their toll on the economy. With more people seeking unemployment and businesses losing money, the Federal Reserve wanted to encourage spending.

While the Fed aimed the reduced rates at business spending, the lower interest rates will affect various financial tools, including personal loans, credit cards, and mortgage loans.

How does the fed rate affect mortgages?

The Federal Reserve does not set mortgage rates, but it does affect banks, and banks can pass those reductions on to the consumer.

The standards set by the Fed help banks decide what prices to use when navigating bank-to-bank lending.

Typically banks and other lenders lower their interest rates to more accurately reflect the Fed rate. In turn, lenders lower their rates to attract more consumers.

The lower federal rate may or may not affect your mortgage, depending on the type of loan you have.

If you have a fixed-rate mortgage, you won’t see any changes unless you opt to refinance your home loan. If you have an adjustable-rate mortgage (ARM), your monthly payments will typically go down.

FED CUTS INTEREST RATES AGAIN — WHY YOU SHOULD REFINANCE DEBT NOW

How you benefit from low-interest rates right now

Homeowners and property owners could benefit a lot from these emergency cuts.

If you have enough equity in your property, consider refinancing your loan for a lower interest rate. Consumers should note that following these emergency cuts, prices have fluctuated, and many lenders have seen an influx of applications. The increased interest in loans and refinancing could make it more difficult to apply or increase your waiting period before approval.

If you’ve been considering a home-equity line of credit, now may be an excellent time to apply as these loans are tied to the federal benchmark, un some longer-term mortgages; alternatively, you may also benefit from a cash-out refinance.

If you’re trying to buy a home, you may or may not be able to take advantage of lower interest rates. Check with lenders in your area to see how mortgage rates have been affected.

MORTGAGE RATES NEAR RECORD LOW — HERE'S WHY IT'S A GOOD IDEA TO REFINANCE

In addition to mortgage rates, you may also be able to save money on new personal loans, car loans and credit card rates.

What should ARM borrowers do during Fed Rate cuts?

Adjustable-rate mortgages are an excellent short-term option for borrowers because they’re easier to qualify for, and they’re less ly to reach the maximum rate in five to seven years.

If you have an adjustable-rate loan, you may want to consider refinancing to a fixed-rate loan while the prices are still low. This is especially true if you’re nearing or past your introductory rate period.

Alternatively, you could also refinance to another ARM loan with a lower interest rate.

If you’re considering refinancing your home loan, make sure you know whether rates in your area are going down. While many states are seeing a reduction in interest rates, it may not be accurate for every community.

Keep in mind that if you do choose to refinance, there will be fees associated with the process. Do a little math to make sure the expense is worth the effort.

If you can’t or don’t want to refinance your mortgage, start setting extra money aside for when rates go back up as your monthly payment will increase again. Consider setting aside the difference between your lower monthly rate and your higher monthly rate, so you have money set aside as a buffer.

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While many people could benefit from the emergency interest rate cut, some may lose a little. For example, customers may see a reduction in the interest rate on interest-bearing savings accounts.

You may also want to wait to buy into CDs or money market accounts to secure higher returns.

If you already have a CD or money market account, your current rate is locked in, so you won’t see any changes.

As the financial market continues to face some uncertainty, taking the time to see if you could benefit from the Federal Reserve’s emergency interest rate cut could save you thousands of dollars, and give you a little more breathing room.

Источник: https://www.foxbusiness.com/money/fed-rate-cuts-mortgages-benefit

Amid surging COVID-19, Fed could take steps to lower mortgage rates, boost economy

Fed’s emergency rate cuts affect mortgages — here’s how you can benefit now
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The Federal Reserve kept its benchmark interest rate at a record low near zero Thursday and signaled its readiness to do more if needed to support an economy under threat from a worsening coronavirus pandemic. (Nov. 5) AP Domestic

As the Federal Reserve concludes a two-day meeting Wednesday, it will be struggling with how to respond to opposing forces in the nation’s COVID-19-fueled economic crisis.

On the one hand, a resurgence of the virus already has slowed the economy, and an even bleaker winter lies ahead. At the same time, wide availability of a vaccine by spring offers the prospect of a substantial improvement.

The Fed already has cut its key short-term interest rate near zero and vowed to keep it there until the economy returns to full employment and inflation runs above its 2% goal “for some time” – a promise that ly would mean no rate hikes until 2024 or beyond, some economists say.

But Fed officials still have more ammunition, largely related to their massive bond-buying stimulus aimed at holding down long-term rates that affect mortgages and other loans. The Fed’s policy decision, which will be released at 2 p.m. on Wednesday, is expected to center around those bond purchases – and it could mean slightly lower monthly costs for homebuyers and other borrowers.

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Fed stimulus: Fed vows to continue bond-buying stimulus

The central bank is also set to update its economic forecasts.

Here's the breakdown of what the Fed may do:

How can the Fed cut long-term rates?

The Fed is now purchasing $80 billion in Treasury bonds and $40 billion in mortgage-backed securities each month, putting downward pressure on long-term interest rates, such as for mortgages and corporate bonds.  

The average maturity of the securities it’s buying is 7.4 years, according to Oxford Economics. Some economists expect Fed officials to buy the same amount of bonds but shift the mix toward those with longer maturities. That would inject more stimulus into the economy by further pushing down rates for mortgages, corporate bonds and other types of loans.

 (Photo: Getty Images)

Why shift bond purchases to cut rates?

COVID-19 is spiking across the country, with cases, hospitalizations and deaths reaching new records. That has led to new constraints on businesses, particularly in California and the Midwest. Job growth slowed sharply in November and initial jobless claims, a rough measure of layoffs, jumped sharply to 947,000 the week ending December 5.

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“The economy really needs,” more stimulus, says Oxford economist Kathy Bostjancic. 

“Fed officials might see the winter virus resurgence as the obvious moment to shoot their last bullet,” Goldman Sachs said in a research note.

Also, after a monthslong deadlock, Congress still hasn’t agreed on a proposed $908 billion relief package for unemployed Americans and struggling businesses. And Treasury Secretary Steven Mnuchin recently ended several Fed emergency lending programs, placing a greater burden on the Fed to prop up a wobbly economy, Bostjancic says.

What is the argument against taking more action?

Several regional Fed bank chiefs have said fiscal aid from Congress is what’s really needed right now. And lawmakers appear to be drawing closer to a deal before unemployment benefits for 12 million Americans, a ban on evictions and other programs expire at year’s end.

While such federal dollars can be doled out quickly, Fed maneuvers typically affect the longer-term outlook, three to six months down the road, says Nomura economist Lewis Alexander. By then, he notes, a vaccine is ly to be widely available, significantly bolstering the economy and lessening the need for more juice from the Fed.

What’s more, mortgage and other rates are already at historic lows, Capital Economics says, with 30-year fixed-rate mortgages at 2.71%, Freddie Mac figures.

Sure, pushing down long-term rates would further stoke the record bull-market by prodding investors to move more money from bonds to stocks. But that could increase Fed officials’ concerns about a market bubble that eventually pops, Bostjancic says.

So what is the Fed ly to do?

“it’s a close call,” Bostjancic says.

She, as well as economists at Goldman and JPMorgan Chase, expect the Fed to shift the bond purchases to trim rates while Nomura, Barclays and Morgan Stanley predict the Fed will stand pat.

Some but not that much. Rates are already historically low and the housing market is booming. A shift in the Fed’s mix could push down mortgage rates by about 15 basis points, lowering the monthly payment on a $200,000 mortgage by $15, or $180 year, says Tendayi Kapfidze, chief economist of Lending Tree.

What else could the Fed do?

Many economists are more confident the Fed will provide more specific guidance on how low long it will continue to buy bonds. Currently, the Fed’s post-meeting statement simply says it will continue the purchases “over coming months.” Fed policymakers have said they want to provide a more detailed roadmap.

A closer look at stimulus: COVID-19 relief package: No stimulus checks but it offers a $300 bonus to unemployment benefits

Goldman Sachs believes the Fed will say it will keep buying bonds at the current pace until the labor market is “on track” to reach full employment and inflation is “on track” to reach 2%.

That’s similar to the Fed’s criteria for raising its key short-term rate but not as rigid.

It ly would mean the Fed starts tapering down the bond purchases in 2023, about a year before raising its short-term rate, Bostjancic says. 

Why a timetable for bond purchases?

Bostjancic says Fed officials ly want to avoid another “taper tantrum” – a 2013 spike in Treasury yields when Fed officials unexpectedly signaled they would start winding down bond purchases following the Great Recession of 2007-09.

Also, investors now expect the Fed to begin tapering the bond purchases in late 2021 or early 2022. By signaling a later start, it could spur more borrowing and cheer Wall Street, Bostjancic says.

Alexander, though, says the Fed may wait until the outlook is clearer before refining its guidance. 

How about Fed’s economic forecasts?

In September, the Fed predicted the economy would contract 3.7% this year and unemployment would end the year at 7.6%. But the economy has recovered from the pandemic more swiftly than expected, with unemployment already at 6.7%. Goldman Sachs expects the Fed to revise its forecast to a 2.5% contraction this year and unemployment of 6.8% at year-end.

Goldman also expects the Fed to modestly raise its estimate of economic growth next year to 4.2%, up from its prior forecast of 4%. Oxford, however, reckons the Fed will lower its estimate for next year as the effects of the virus spike outweigh the boost from the vaccine.

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Источник: https://www.usatoday.com/story/money/2020/12/16/interest-rate-fed-may-move-cut-mortgage-other-long-term-rates/3913085001/

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