Sunday, February 03, 2008

Falling Interest Rates and Your Mortgage

Well, I've been so busy recently that I haven't posted. December often seems to be the busiest time of year -- and now it's time to do taxes.

I hope readers were able to take steps in advance, to profit from the lower interest rates as outlined in the last post. The economy and markets are weaker than most people expected, and the Fed has decided they'd better come to the rescue with aggressive rate cuts. Even with the two recent cuts totalling 125 basis points (1.25 percentage points), it's quite possible they will cut again at their next meeting in late March.

Although the economy won't really feel the effects of rate cuts for a few months, it's already helping some people as they rush to refinance their mortgages. It's helping others who have adjustable-rate mortgages because their rates won't adjust as high as they otherwise would.

By the way, I hope everyone has learned the lesson: When interest rates are low, it's not time to get an adjustable-rate mortgage. (In which direction do you think those low rates are gonna adjust?!) Even if rates are fairly high, it's a risk, and not to be taken lightly. Don't stretch to buy more house than you can afford, don't finance 90% or 100% of the house value, and make sure your mortagage doesn't have a prepayment penalty. Don't even buy a house unless you have a good emergency cash fund. These rules are basic, yet an enormous number of homeowners ignored them -- and are now paying the price. We all are paying with them, as neighborhoods become saturated with foreclosures, lenders become reluctant to make new loans, and the economy slows.

In other words, there's a lot to be said for the traditional fixed-rate mortgage. As interest rates fall, get ready to refinance if you can get a better rate, or if you currently have an adjustable rate.

Next time: Is it time to refinance right now?

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