If fed cuts today, what will that do to mortgage rates?

[JohnDoe]

Any predictions?

 

[Retire Soon]

Probably not much immediate effect. Mortages are closely tied to 10 year treasuries, and the Fed Funds rate cut will only have an effect on short term rates.

 

[brewer12345]

Which flavor of mortgage did you have in mind? May not mean much to fixed mortgages, but 6 month, 1 year, etc. ARMs will see a big benefit.

 

[ProspectiveBum]

Which flavor of mortgage did you have in mind? May not mean much to fixed mortgages, but 6 month, 1 year, etc. ARMs will see a big benefit.

That'll kick-start the housing market! Bye-bye [-]recession[/-] depression!

 

[brewer12345]

That'll kick-start the housing market! Bye-bye [-]recession[/-] depression!

There is a bloomberg article floating around mentioning the fact that all these rate cuts mean that there may not be an upward reset of ARM rates when the teaser period ends. Bernanke 1 Paulson 0.

 

[mathjak107]

bonds took a big hit after the rate announcement and spiked up before recoving and dropping about 1/2 way down.

these rate cuts may actually cause fixed rate mortgages to rise as the fear of inflation keeps them up

 

[growing_older]

ARMs tied to Prime got a .75 reduction last week and another .5 reduction today. Sweet. If you're tied to something else the effect will be muted.

 

[audreyh1]

Are any ARMs tied to Prime?

Audrey

 

[jazz4cash]

Are any ARMs tied to Prime?

Audrey

I had a Wachovia HELOC that was pegged to prime-1/2 which I traded for a fixed loan last summer. I've seen others that were prime-3/4

 

[growing_older]

Well, mine is. I guess I assumed since I had one they were somewhat common. Maybe not? I never did a poll.

 

[mathjak107]

arms are pegged to short term rates. conventional mortgages are not. they are tied to other indexes that use longer term bonds or costs. rightnow short term rates have been cut drastically, longer rates are actually up a hair

 

[brewer12345]

Are any ARMs tied to Prime?

Audrey

Not that I am aware. Usually just HELOCs are tied to rime. But ARMs are usually tied t o stuff that stays pretty tight with the fed funds/prime rates: MTA, COFI, CODI, CMT, LIBOR, etc. If you are actually interested in the details, there is more than you ever wanted to know about these rate indexes here: Mortgage-X ~ Everything There Is To Know About Mortgage Loans

 

[jblack]

Following the additional rate cut, 15yr fixed down 1/4 to 5.0% today at PenFed

But as previously pointed out elsewhere, probably more tied to the 10yr treasury that is also down a bit

 

[audreyh1]

Not that I am aware. Usually just HELOCs are tied to rime. But ARMs are usually tied t o stuff that stays pretty tight with the fed funds/prime rates: MTA, COFI, CODI, CMT, LIBOR, etc.

I didn't think any ARMs were tied to Prime. Just wanted to be sure.

I usually hear LIBOR, and that is partly dependent on European rates from what I understand.

Audrey

 

[brewer12345]

I usually here LIBOR, and that is partly dependent on European rates from what I understand.

Audrey

Nope, not tied to European rates. LIBOR is the rate at which the big money center banks agree to lend to each other for a given term (one day, one month, three months, one year, etc.) in a particular currency (dollar, pound, Euro, etc.). Its set by auction, once a day. Usually, LIBOR rates track fed funds and/or the shhort term T bill pretty closely. Things got really wacky in the second half of last year, but usually you can figure dollar LIBOR being within 1/4 or 1/2% within fed funds.

 

[audreyh1]

Oh, OK. I guess I had read something to the effect that adjustable rate mortgages hadn't come down much (late last year) because the Europeans (or was it the British) hadn't lowered their interest rate, and that this somehow affected LIBOR.

Audrey

 

[brewer12345]

Oh, OK. I guess I had read something to the effect that adjustable rate mortgages hadn't come down much (late last year) because the Europeans (or was it the British) hadn't lowered their interest rate, and that this somehow affected LIBOR.

Audrey

Uh, maybe true for mortgage rates in Europe.

 

[audreyh1]

Thanks for setting me straight.

Audrey

 

[JohnDoe]

Would it better to refi in my name only or do it jointly with my wife's name on the mortgage too?

 

[Independent]

There is a bloomberg article floating around mentioning the fact that all these rate cuts mean that there may not be an upward reset of ARM rates when the teaser period ends. Bernanke 1 Paulson 0.

I don't have an ARM, so I haven't been paying attention. I also figured that the Fed controls very short term rates, it only "influences" longer rates. But, after the last rate cut I had to look this up.

What I've been hearing on the news made me think something like this: "People got ARMs in 2005 at low rates. Lots of them were 3-year resets. Since then, the index rates have gone up. But since the ARMs don't reset until 2008, borrower's payments have been fixed. When the ARM resets, payments will shoot up, and borrowers will be in trouble."

Some of these loans use the 3 year treasury as the index, so here are some 3 year constant maturity rates per FRED,
Feb 4, 2005: 3.46%
Jul 6, 2007: 4.95%

That's a ratio of 1.43. On a "non-teaser" amortizing mortgage the payments will go up less than 43%, but if the initial rate had a teaser margin, you could see a payment jump in this neighborhood. So last July it looked like these 2005 borrowers were in trouble.

But these mortgages didn't reset last July. Since then the Fed has been driving fed funds rates down, and 3 year treasuries have followed. So here is the latest rate:

Jan 25, 2008: 2.21%

Unless I'm missing something, a "plain vanilla" 3 year ARM originated in Feb 2005 is likely to reset for a lower payment in Feb 2008. If the teaser amounted to "understating" the initial rate by 1%, it's still going to reset lower.

The Fed isn't exactly sending borrowers checks, but seems to be doing something that's almost as good.


http://research.stlouisfed.org/fred2/data/WGS3YR.txt

 

[Retire Soon]

There is also a "margin" that is added to the specific index that is used on the loan documents to determine the reset of the payment on an Adjustable Rate Mortgage (ARM). Usually this margin is between 2% and 5%. The one month LIBOR, index is now at about 3.27% (there are many other indexes that may also be used). If you add a margin of say, 3% this would give an interest rate of 6.27%. However, ARMs also offer protection in terms of a "cap", which might perhaps be 3% on the first reset. In the above example, the resulting interest rate would still be 6.27%. For further protection the lender may also offer an annual cap on second and subsequent resets of perhaps 2%. If the LIBOR should go to 6.14% a year later, the margin plus index would give a reset of 9.14%. However since their is a cap of 2% on the second and subsequent resets, the most the interest on the payment would be 8.27%, because the index plus margin cannot increase more than the 2% cap. There is also a "lifetime cap" of usually 6%, which means the interest rate can never get higher than the one year LIBOR at the close of escrow (not the teaser rate). Many loans also have negative amortization, meaning your payment may not cover all of the interest. In this situation, the loan amount may increase as opposed to a fixed rate mortage that is fully amoritized with the principal decreasing with each payment. If you're still reading this post, personally, I would stay away from ARMs. Unless, this is the only loan you can qualify or you know you'll be moving in a few years. DW and I took out a subprime ARM in 2004, because we were positive we would be selling our home in 2006. We then pocketed the savings in interest and banked it. The link below will take you to an ARM reset calculator at BankRate.com.

Mortgage reset calculator: Get your new ARM payment and rate

 

[Independent]

I wasn't thinking about my mortgage specifically (I paid mine off), I was thinking about the economic impact of the Fed's big rate cuts. We've been hearing that lots of people are going to be in trouble when their ARMs reset. The rates I see seem to have dropped so quickly that some people will discover that the feared reset actually results in a lower monthly payment.

I checked some payment amounts with a 3% margin. A 30 year amortizing $200,000 mortgage indexed to 3-year treasuries plus a margin of 3.00% would have had a monthly payment of $1,235 when originated in Feb 2005. Last July, the borrower was thinking that the reset in Feb 2008 might push the payment up to $1,410. In fact, because rates have come down so sharply, the reset could drop the payment to $1,094.

It looks like the Fed really did this borrower a favor.

I think of a "teaser" as just an unrealistically low margin in the first period - something like 1.00% which will be replaced by 3.00% at the first reset. For my one case, that would have made the payments for the first 3 years $998 instead of $1,235. That case would have reset to $1,389 using last July's interest rates - a pretty big step.
But with the new rates, the payment only goes up to $1,078. That's a step that's smaller than people should have expected.

I suppose there are 5.00% teasers out there with no amortization. Those people are going to see big increases.

My conclusion from this one data point is that the problem is "teaser" rates and "negative amortization" more than ARMs in general. The Fed has pushed rates so far down that anyone who's seeing big increases on a reset now is probably someone who signed up for an original deal that should have failed the "if it's to good to be true .... " test.

 

[GoodSense]

Still don't understand

Sorry I am pretty obtuse in this regard...If mortgage interest rates have little to do with the fed rate cuts, why did mortgage interest rates drop so much 1+ week ago, almost the same time as the fed rate cut? Was it a pure coincidence? Or was the 10-year treasury bill rate somehow remotely related to the short-term rate, although not directly?

Thanks in advance for your enlightenment.

 

[twaddle]

They are related in an odd way. The 10-year yield was pushed down due to fear and a flight to safety. The fed lowered the fed funds rate to alleviate that fear. So, the 10-year yield actually went up right after the fed lowered short-term rates.

So, if you want lower fixed rate mortgages, fear is good. Fed cuts are bad. High inflation expectations would also be bad, and inflation expectations sometimes go up in response to fed cuts.

 

[GoodSense]

Maybe I should wait for the recession to be in full swing before I refinance...(are we already? Seems like nobody knows!)

Thanks for the explanation!