“Exceptionally” low mortgage rates for buyers and owners

by Dan Krell
© 2012

Last week, the Fed issued a statement from the most recent Federal Open Market Committee meeting indicating that the target rate was to remain between 0 and ¼ percent; and an “exceptionally” low rate is warranted through 2014. Although there were some bright areas of the economy, some sectors remain an obstacle- including housing (which was described as “depressed”).

The Fed’s estimation of the housing market appears contrary to the seemingly upbeat reports issued by the National Association of Realtors®, which recently revised downward several years’ worth of housing data. However, by keeping an ear to the ground, the Fed goes beyond the typical statistical analysis by collecting and analyzing anecdotal data from industry experts around the country. The anecdotes are compiled, analyzed and published eight times a year by the Fed as the “Beige Book.” Formally known as the “Summery of Commentary on Current Economic Conditions by Federal Reserve District,” the most recent report indicated an overall feeling that home sales are sluggish throughout the country. Furthermore, the report from the Richmond District (which covers MD, DC, VA) indicates that although there were a few pockets of “strength,” a softened housing market was depicted citing the sentiment of some local real estate agents.

Getting back to interest rates, the Fed’s monetary policy of “exceptionally” low interest rates for some time could mean cheap mortgage money for you. There’s no telling how much lower mortgage interest rates can go, as we are already seeing some of the lowest interest rates in several generations. The interest rate on your mortgage is tied directly to your monthly mortgage payment; a lower rate typically means a lower monthly payment.

For home buyers, “exceptionally” low interest rates could result in a more affordable home purchase; buying a home today may possibly be cheaper than paying rent. Even if home prices continue at the current level during the next few years, home affordability can drastically change if mortgage rates rise.

If you currently own a home, “exceptionally” low interest rates could mean that you could possibly reduce your monthly mortgage payment. However, refinancing is not for everyone. According to the Federal Reserve Board’s “A Consumer’s Guide to Mortgage Refinancings,” refinancing may not be for you if: you’ve had your mortgage for a long time, your mortgage has a prepayment penalty, or you plan to move in the next few years.

For a typical mortgage, the proportion of the mortgage payment that is applied to principal increases through the life of the loan. So, if you’ve had your mortgage for a while, chances are that you’ve been increasingly paying toward the mortgage principal (and building equity). However, if you refinance, the mortgage life cycle begins anew and much of your payment would be applied to interest.

If your mortgage has a pre-payment penalty, you can be charged for paying off your mortgage early. Any pre-payment penalty should be considered in the total cost of the refinance so as to consider how long it may take to “break even” based on your monthly mortgage savings.

In today’s market, many home owners are putting off a move and refinancing instead. However, if you’re planning to sell your home soon after the refinance, consider the “beak even” point of your monthly mortgage savings. Selling your home shortly after a refinance could make the short term mortgage savings seem short sighted.

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of January 30, 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.