The Federal Reserve’s latest effort to boost the economy by driving down long-term interest rates won’t have a big impact on home and car buyers, savers or credit card users.
Any noticeable changes from the central bank shuffling $400 billion of its portfolio are likely to be mixed. Although borrowers may benefit from lower rates on mortgages and other fixed-rate loans, savers holding long-term bonds are likely to see their interest income dip.
Mortgage rates are a focus of the new plan. The Fed intends to sell $400 billion of its shorter-term Treasurys to buy longer-term Treasurys by June 2012. And it will reinvest principal payments from its mortgage-backed securities to help keep mortgage rates ultralow.
These steps alone won’t spur a housing boom. Interest rates already are at the lowest level in six decades, averaging 4.09 percent on a 30-year fixed mortgage and 3.29 percent on a 15-year fixed.
Prospective homebuyers aren’t putting off home purchases because rates are too high. They’re holding off because they’re lacking confidence. They’re worried about a recession or job loss and are unwilling to take on more debt, even at lower rates, or aren’t able to qualify. Others see no reason to jump into the housing market when prices are still falling.
Still, the Fed hopes to at least stimulate more refinancing activity as a way to get the economy moving. “This may make it even more affordable for those few who can afford to buy,” says Diane Swonk, chief economist at Mesirow Financial Inc., a Chicago-based financial services firm. But it only helps a select group, she says, leaving most would-be homebuyers still unable to take advantage.
From the consumer standpoint, borrowers will benefit only from better rates on longer-term loans: fixed-rate mortgages, fixed-rate home equity loans and, for entrepreneurs, fixed-rate small business loans.
Consider the following four things when deciding whether or not to lock in your mortgage interest rate:
- Lock in your rate as soon as you know you have a good deal in front of you, and you know roughly when you can close (30 to 60 days should be the longest lock period).
. - Lock it in with a lender who has the option of a “float down” if possible. If rates get better, you can participate in a portion of that improvement.
. - Lock it in with a lender who has a liberal rate-lock extension policy. No rate-lock extensions are free. Some even expire beyond the ability to extend. Make sure, whenever possible, that you work with a lender who will allow you to extend your lock if for some reason your deal takes a little longer to close than anticipated.
. - Don’t think about it very long. The rates go up a whole bunch faster than they come down. If the above is to your liking, lock!
No one can time the market. No one knows – plain and simple. If anyone tells you what will happen to interest rates in the future, consider not working with them – they think they know things they could not possibly know.
We do know what moves rates. We can even know anecdotally (after the fact) what did move rates. But then, we also know who won the Super Bowl – on Monday morning. We even know why, almost exactly why.
But, we never know what will happen to them. Lock in your interest rate with the above options as soon as you are able to.
If you have questions about locking in interest rates, use the comment link below to contact us with your questions and we’ll get back to you with answers.