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Fed Funds Rate down .5%

WASHINGTON (Reuters) - The U.S. Federal Reserve on Tuesday slashed the benchmark federal funds rate by a half-percentage point in a bold bid to buffer the economy from a housing slump and related financial market turbulence.
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The decision by the central bank’s Federal Open Market Committee took the overnight rate down to 4.75 percent, its lowest level since May of last year. It was the first cut in the interbank rate — the Fed’s main tool to influence the economy — since June 2003 and the first half-point reduction since November 2002.

Financial markets had widely expected the Fed to lower overnight borrowing costs, but were split over whether the move would be a quarter-point or more-aggressive half-point.

In a related move, the Fed also lowered the discount rate it charges for direct loans to banks by a half-point to 5.25 percent.

What does this mean?

According to Marketwatch:

Here’s what consumers can expect:

If a consumer is paying 8.25% interest on a $100,000 loan that is based on the prime rate — such as a home-equity line — a rate reset to 7.75% is likely. That’s the difference of about $500 a year, or roughly $41.66 a month in interest charges.

Resets on some adjustable-rate mortgages will be slightly better. Many ARM interest rates are based on an average of Treasury note yields coupled with a fixed margin, now at about 2.75 percentage points. At Tuesday’s 10-year yield of 4.49%, the rate is 7.24%. In July, it was at 7.77%. That makes the monthly payment on a $200,000 mortgage $1,363, about $73 less than it was in July. But Treasurys could head even lower following the Fed action.

Rates on credit cards, which have taken on a bigger role in consumer financing in recent months, are likely to dip a bit too, lowering minimum monthly payments.

Savings-deposit rates will go down, meaning that your bank balances won’t appreciate at the same rates you’ve seen all year.

Ditto on money market rates, hurting those on fixed incomes — generally the elderly — who rely on cash generated from such safe investments.

Interest rates on new loans for cars will fall, though it won’t have any effect on loans already in place. But Brian Bethune, the U.S. economist with Global Insight, urges consumers to wait until contract negotiations between autoworkers and their bosses are done this month. “They could pull out all the stops,” he said about automakers’ desire to unload inventory. And if the Fed lowers rates again next month, all the better.

Buying a home vs. renting is a big decision that takes careful consideration, as most mortgage consultants will agree. But the rewards of home ownership are great. For many years, purchasing real estate has been considered an extremely profitable investment. It is an achievement that offers a sense of pride, financial stability and potential tax advantages.

Yes, there are certain responsibilities associated with owning a home. Landlords will often argue the benefits of renting, and for obvious reason. If you are renting, you’re helping them make their mortgage payment.

The numbers are staggering if you look at it this way. If you are paying $1,000 per month for an apartment, and you know your rent will increase 5% every year, then over the next five years you will pay your landlord $66,309. If you are currently renting a house, you may be paying much more than that each month. Either way, you gain no equity by shelling out this monthly housing expense and you certainly won’t benefit when the property value goes up!

However, if you were to purchase your own home or condominium, you would be well on your way toward building equity within that same five-year period. By choosing a fixed-rate loan program, you can have the comfort of knowing that your monthly mortgage payment will never go up. In fact, you would have the option of refinancing to a lower interest rate at some point in the future should interest rates drop, and this would cause your monthly mortgage commitment to go down.

In addition to building equity, there are tax advantages that come into play with home ownership. Depending on your tax bracket, owning a home is often less expensive than renting after taxes. Interest payments on a mortgage below $1 million are tax-deductible, and your mortgage consultant should help you evaluate the tax advantages of various loan scenarios, and share this information with your tax consultant to glean feedback on your behalf.

To find the loan program that is right for you, your mortgage consultant will need to evaluate your monthly household income, current assets and savings, as well as any monthly obligations you may have for credit card payments, car payments, child support, etc. These prequalification factors, along with the report of your credit score, will determine how much house you can afford and what interest rate you will pay for financing. It is also important to let your mortgage consultant know what your future goals are, because this will help narrow down which loan option is the best fit for your long-term needs.

There are many different types of loan programs available, including “low” and “no” down payment mortgage programs. These types of programs require the borrower to provide less than 3 percent of the loan amount as down payment. FHA lenders rule that the mortgage payment, including principal, interest, taxes and insurance (PITI) should not exceed 31 percent of your gross income, and the PITI plus other long-term debt (car payments, etc.) should not exceed 43 percent of your gross income.

Housing is an expense that takes a big bite out of the monthly budget. If you are a renter and feel that “home” is more than just someplace to hang your hat, think about the advantages of purchasing real estate. It may be time to take the step into building your personal net worth as a home owner.

Many homeowners are using the appreciation in there homes to get rid of high rate credit cards by consolidating. When you consolidate your loans you often reduce the amount of money your spending each month.

One of the main benefits to refinancing is to consolidate consumer debt. Consumer debt (i.e. Credit Cards ampersand Auto Payment) is typically at a higher interest rate and is never tax deductible. Interest paid on debt tied to your home is deducted from your income at the end of the year often substantially reducing your tax liability. This tax favorable status is one of the many benefits of refinancing.

Refinancing your home can save you hundreds per month when you consolidate debt.

What if you want to add on, remodel or update the kitchen? You may not have the cash to do so, but the cost of improvements may be more than covered by the increase in value of the home. This is a great use for a home equity line of credit or a cash-out refinance.

Many people refinance to change from a variable rate to a fixed one or vice versa. Refinancing a high interest rate after a 24 month good payment history could save you a lot of money on your monthly payment.

If planning to purchase investment property, refinancing your primary residence is a great way to raise the cash for the down payment required.

Always consider your long term benefits of doing a refinance. The interest rate is not the most important aspect of the transaction. Even if your current rate is lower, you will probably save more money over time with a debt consolidation refinance then you would be with maintaining the situation you are currently in. Ask yourself a few questions: How long have I had this balance on my cards? At the rate I am paying my credit card debt down, how long will it actually take to pay them completely off? What will be my total cost once I have paid off all my credit card debt?

You can refinance to switch to an interest only loan to maximize cash flow or to switch to a Pay Option ARM to provide yourself with a lot of flexibility in your monthly mortgage payment. Some people also refinance simply to get a way from their current mortgage lender because they are not pleased with them.

Another main benefit of refinancing is to get out of PMI (Private Mortgage Insurance). In most cases if your Loan-To-Value was above 80% when you moved into the home then you most likely got stuck paying PMI. Your home may have appreciated quite substantially over the past year or two and with a new lender they will take new appraised value thus eliminating PMI.

Most people refinance to because of changes in their financial situations. Some, after determining that they can afford a bigger mortgage payment, refinance to a shorter loan term to save on the total amount of interest charges. Others, after experiencing a decrease in income, may refinance to a longer term loan to take advantage of the lower monthly payments. Yet others refinance to withdraw from the equity built in their homes for other financial purposes.

Using equity in your home to pay off high rate loans (credit cards, auto loans, etc.) may have certain tax benefits also. Consult your CPA for more information.

Many homeowners refinance to pull out cash to purchase another property.

To reduce the term or length of your loan, doing so can save you thousands of dollars in interest.

Editors Note: Due to the mortgage and credit crunch, interest only mortgages are more difficult to obtain. If you’re in need of a Denver home loan contact us to discuss your mortgage options.

Paying interest only is a great way to minimize housing expenses per month. The concept of this type of payment structure is to allow you a set amount of time in which your payments will be based off of interest only. Every borrower should keep in mind that this loan will not pay down any of the principal balance during the interest only portion of the loan.

Why pay interest only - do you think you will ever really pay off your mortgage? How do you gain equity in your home? Is it from paying down your principal or more so from the market appreciation of your home? When you consider these things paying interest only and having the extra cash flow often makes good sense.

Examine every loan option with your mortgage broker before you decide on a interest only loan program. Your mortgage broker will be able to determine if the interest only option is a good fit for you. This will ensure that you are not frustrated by an uninformed decision years down the road.

Many lenders charge a small premium in order to have interest only premiums, usually 1/8th or 1/4p point. Make sure you discuss this with your mortgage broker as well.

With an interest only loan you will still build equity in your home even if you only make the interest only payments and never apply any extra payment towards the principal. This is achieved because your house is always going to appreciate and gain value (unless you live in a community with declining home values, which is not very common). Therefore, You can still gain equity in your home while freeing up cash to pay down other bills, invest, and/or just to simply put save for a rainy day.

Many people choose interest only loans to increase their cash flow and not be encumbered by such a huge mortgage payment.

With any type of interest only loan you can choose to make additional payments to reduce your principal balance. These type of loans work very well with borrowers whose income may fluctuate on a monthly basis or borrowers who know they will be receiving a pay increase in the future and want to minimize the monthly payment until they have a larger income.

Interest Only loans allow you to purchase a larger house without increasing your monthly mortgage expense and it gives you mortgage payment flexibility to better manage your monthly cash flow without deferring interest.

Paying interest only may free up needed cash flow to help make payments on an investment property you may want to purchase.

Often times a real estate investor will want an interest only loan. The low minimum payments help to increase cash flow for other purchases.

The use of interest-only loans was unheard of just a few years ago, but in the last year these loans have exploded, giving many home buyers leverage against escalating home prices and enabling them to buy homes. A recent Wells Fargo survey of American homeowners showed that the majority of homeowners do pay principal on interest-only loans when they are flush with cash. 73% pay both the principal and interest at least some of the time. Only 25% pay only interest all of the time. Interest-only options on home loans give the home buyer the flexibility to choose how much to pay on their mortgage each month - just the interest-only payment or a little extra to pay down that principal.

Interest Only mortgages require monthly payment of “interest only” for a specified period, usually the initial 10 years of a 30 year loan term. At the end of the interest only period, the loan is re-amortized to pay off the mortgage in the remaining 20 years. The monthly payments will naturally be much higher compared to that of the interest only period. In practice, most homeowner refinance before the end of the interest only period. The disadvantage of Interest Only loans is in that the homeowner will not build equity during the interest only period. There is also the risk that the home has since lost value when it comes time to refinance.

Paying interest only may allow you to contribute to your 401k, or IRA retirement account, because of your new lower monthly payment.

Interest only loans can also be of value for borrower’s seeking to consolidate other debt carrying high interest rates like credit cards. By minimizing your mortgage payment, you can afford to pay down these other debts more quickly.

Your credit maybe considered bad and causing a low score for a number of reasons. While the are numerous reasons for bad credit some of the more common ones are as follows. You have numerous credit cards that are maxed out or close to the credit limit, you have unpaid judgments or collection accounts, you have 30 day lates showing on your payment history. All of these examples can cause severe drops in your credit score.

One area people overlook that can negatively impact their credit report is failing to honor mobile phone contracts. Cell phone companies give away free phones to customers who sign on with their services for a specified period of time, usually one to two years. Terminating subscription to the phone service before the expiration and failing to reimburse the phone carrier for the cost of the free phone is considered breaking the contract. Cell phone companies would then report to the credit bureaus and cause a blemish on the credit history. Such blemishes are not serious, but they nonetheless lower credit scores.

Credit scores generally range from about 350 to 850.

• 800+ = great credit
• 700-799 = good credit
• 600-699 = average credit
• 500-599 = bad credit
• under 500 = hard to get a loan at all

Your credit can be bad for a variety of reasons: Late payments High Account Balances Bankruptcy Collections Charge offs To minimize negative on your factors you will need to pay down balances, make payments on time, dispute incorrect information, and let the passing of time lessen the impact of past bad credit.

To many inquires at one time can affect your credit score.

If you credit score is low because of a high balance on a credit card transfer some of the balance to another card. Try not to open a new card because to do this can also reduce your score.

One reason why your credit may be bad is because of erroneous information reported on your credit report. This can happen to anyone and is actually quite common. This is one reason why you need to check your credit report out at least once per every 12 months. By checking you credit report for free you can keep an eye on your credit and make sure that you take care of any erroneous information when it happens, not when you are trying to apply for a loan and it comes as a surprise to everyone. Utilize your one free annual credit report each year to take a look over your credit to make sure everything looks well. There are many reasons as to why credit report errors can happen so make sure that if errors do happen to you that you rectify the situation immediately.

Maintaining high balances on your credit cards and other revolving debt negatively impacts your credit score. Paying down credit cards balances below the 70%, 50%, and 30% thresholds is a quick way to boost your credit score.

Paying down your credit card balances to around 30% will help your score. If you can, try to keep the balance at that level at all times. If you need to raise your score quickly, and don’t have the money to pay down your balances, you may request that your creditors increase your credit limit. This will in turn lower your balance in comparison to the limit. Only use this technique if you are responsible with your credit. Once your limit is increased, it may be tempting to go on a shopping spree. Know that if you do this, you will be in a much worse situation than when you started. Not only will you have more debt, but you will increase your ratio of balance to limit.

There are several ways to increase your credit. However the fundamental principle is the bills must be paid on time. This doesn’t mean by the due date. For the sake of your credit a payment must NEVER be more then 30 days late. If you are acquiring 30 day lates on your credit then your credit standing will deteriorate quickly. Judgments also hurt your credit even if you pay them.

It is also important to note that a credit score is a snapshot. Although it shows your payment history, length of credit, etc. having inaccurate (negative) information removed from your credit bureau report will immediately reflect an increase in your score.

If you do decide to pay off some of your credit cards, be sure to leave the cards open. The credit bureaus look favorably upon accounts that have been open for a substantial period of time, especially if they are showing a zero balance.

Remember that a credit score amounts to a prediction of how likely it will be that you go 60 days late or more on your mortgage in the next two years. One thing that will really lower this score is if you carry high balances on revolving debt and then start making a few of the payments late. This is the pattern of a consumer who is close to getting in trouble with debt.

Things that may go into a collection or judgment that will hurt you credit are; unpaid medical payments, unpaid utility payments, and unpaid cell phones or cable payments.

Editors Note: Due to the mortgage and credit crunch, option arm mortgages are more difficult to get. If you’re in need of a Denver mortgage contact us to discuss your mortgage options.

Self-employed borrowers with inconsistent income Borrowers with inadequate or no retirement savings Borrowers who want cash reserves for emergencies Borrowers who need money to start or expand a business Borrowers who need mortgage payments to be as small as possible Borrowers who want to stop using high interest credit cards Borrowers seeking financial flexibility

The great thing about the Pay Option ARM is that it can benefit most people. Because of its flexibility, it can be catered to meet the needs and goals of most people. I personally like the Pay Option ARM because it gives me more cash flow on my rental property and I have more money to invest in other properties or investments.

However, it really needs to be conveyed that this loan is NOT meant for everyone. The Pay Option mortgage can have its down falls and if you are not the type of person who is very involved with their finances, you might want to consider a 3/1 or 5/1 Interest only ARM.

The pay option arm is a great alternative for those considering a Reverse Mortgage giving them a much lower payment option.

Pay Option ARMs are great for many borrowers. Another common situation is borrowers who own a rental property. The flexibility and minimum payments can be used to maximize cash flow from the property and or to off set additional expenses such as repairs.

Pay Option ARM is also referred to as a Pick a Payment loan. It gives the borrower the option to make one of four payment types every month, (1) minimum payment, (2) interest only payment, (3)payment based on 30 year amortizations, and (4) payment based on 15 year amortizations.

Before lenders lend money, they need to be assured that the funds will be repaid. In other words, is the prospective borrower creditworthy? To find out, they ask for various types of information.

Sub-prime lenders understand you may have come upon some hard times in the past and will look at your more recent credit history.

Lenders look at the risk that you will default on the loan, based on several factors. Those include credit score, history of paying your mortgage or rent on time, debt-to-income ratio, occupancy type (primary residence, second home or investment property), property type (single-family, 2-unit, condo), percentage of the property’s value you want to borrow (60%, 70% 80% 100%), and work history, among others.

Lenders will look at an applicants past credit history, income and the value of collateral being used to secure the mortgage. The lenders will compare this information to their guidelines to determine if the applicant is a good credit risk.

With regards to repayment capability, most banks prefer that a borrower has total debt obligations of less than 45% of gross income. Total debt include any monthly obligations the borrower has, including the proposed mortgage payment, property tax, homeowner insurance, automobile financing, credit card installments, alimony, etc. Utility and food costs are not considered debts and are not included in the Debt-to-Income ratio. Some non-prime mortgage lenders allow a Debt-to-Income ratio of up to 55%.

Lenders will look for job stability, credit worthiness, disposable income, liquid assets, debt to income ratios and loan to value ratios among many other things. Sometimes a borrower can be deficient or weak in one of the above mentioned areas but make up for it in others to still be considered for the financing desired. Lenders don’t typically want to see a lot of job changing or career changing happening. Also, obviously the better the credit the better the chance the lender will be repaid on the debt. Disposable income is how much income is left over after you have paid all of your monthly obligations. Debt to income is a ratio that is calculated based off of how much you make divided by how much your obligations are and LTV (loan to value is simply how much of a mortgage you are borrowing compared to how much your home is valued at. These are all very important items that a lender looks at as a part of your whole package.

Reserves is another factor that lenders want to see. Reserves are simply how much liquid cash you have in the bank to make payments with. If you are a first time home buyer the reserves can be anywhere from 2 -6 months worth of PITI (Principle, Interest, Taxes and Insurance). Various lenders will have different guidelines so be sure to ask your Mortgage Professional how much cash you will need to have in reserves.

Your credit worthiness will affect the interest rate and the number of programs that are available to you.

Benefits of refinancing your home loan: 

• For many people, refinancing their home can help them save a lot of money every month. There are two types of refinances. One is a cash-out refinance. This can be used to pull equity from your home, or to pay off debt. The other type of refinance is a rate and term refinance, where you change your interest rate or loan program.
• Many homeowners refinance to pay off their mortgage in shorter time with almost the same monthly payments. This is usually done by refinancing a 30-year mortgage with a new 15-year or 20-year mortgage with a lower interest rate.
• If you are refinancing to take cash out to pay off high interest credit cards, then the refinance is a benefit to you. The credit cards could take years to pay off, and the interest on the cards is not tax deductible. The mortgage interest on the other hand is tax deductible, saving you even more money than just your credit card monthly savings.
• Refinancing can benefit you if you need to get cash in order to do a remodel or any other home improvement. Refinancing your current mortgage could save you thousands of dollars in interest payments over other more expensive credit sources available.
• If you refinance to a lower interest rate you benefit from monthly cash savings. These monthly cash savings can be used to invest for your future further increasing the benefits of the refinance.
• You can also pull cash out of your home to use as a down payment on a property you plan to rent, which will usually reduce your interest rates when purchasing cash flow properties.
• Refinancing can also maximize the money that you are spending every month. If you are able to lower your term and keep your payment relatively close to what you are paying now, you will be accomplishing more for the same amount of money.
• Just remember that if you pull out more than $100,000 beyond what a home-improvement project costs you may not be able to deduct the interest on your taxes. Always consult a certified professional before making major decisions.

Different lenders have different mortgage application requirements. The following information is generally required: Social Security Number Employment History (for 2 years) Pay stubs and W2’s, Checking, Savings Accounts and CDs Retirement Plan Liabilities (creditors names, monthly payments, and balances)

If you have had prior bankruptcies, the lender will require all of your bankruptcy paperwork.

The main thing your broker will need this: What is your reason for getting a mortgage? Once you have answered that question the rest is pretty easy. You will need different documentation if you need a mortgage for a construction loan vs. a refinance.

At settlement, you will be required to present a photo identification. To avoid complications at closing, it is a good idea to give to your mortgage broker a copy of the identification at application to ensure that the loan docs have the correct spelling of your name.

If you are paying off credit cards or other consumer debts through the proceeds of your mortgage loan you will need to provide escrow or the settlement agent recent copies of the statements from these accounts. This is so the correct amount will be paid and mailed to the correct address.

If you have had a divorce, the lender will most likely require your divorce decree.

It is better to provide the broker with more information and have it be not needed. If you undersupply the broker with what’s been requested then your holding up your own loan.

If you have had past credit problems, some lenders will require letters of explanation of the credit problems.

The amount of paperwork required may seem overwhelming. Your loan officer or the processor will let you know exactly what they need. After you give them those documents, they may ask for more. It is very important to provide everything as quickly as possible. Often your application does not get submitted to underwriting until everything is received from you.

You will need to document assets if you list them on your application. Generally you will need your last 2 months statements to document the assets. Documenting assets can be the difference to qualifying for the loan desired or qualifying for a little bit better interest rate.

A HELOC is a home equity line of credit.

This type of loan is basically a line of credit secured by a second mortgage on a property. You can borrow a much as you need as long as you do not exceed the maximum loan amount. You pay interest on the outstanding loan balance and not the entire line of credit.

A Home Equity Line of Credit is an open ended mortgage, meaning a homeowner can withdraw and repay as often as he likes, up to the available credit limit. A HELOC works much like a credit card account in that respect. It differs from a credit card account in that a credit card account is an unsecured loan, whereas a HELOC is secured by the homeowner’s property.

Usually, whenever you have a mortgage that is above 80% Loan TO Value, then the difference above 80% is usually a HELOC loan. For example, if you need 95% Loan To Value then your 1st mortgage will be at 80% Loan To Value and at a lower rate and the remaining 15% will be considered a 2nd mortgage and be a HELOC.

A HELOC (home equity line of credit) is an excellent financing tool, for some borrowers. A HELOC is essentially a line of credit secured by a mortgage or deed of trust on your home. You only pay interest on the amounts you borrow on the HELOC. If you don’t use any of the line of credit, then you don’t make any monthly payments. You can draw from the HELOC by writing checks issued to you by the lender. Usually a HELOC is considered a second lien on your property.

It’s important to be careful with HELOC’s. As any other type of credit they have a good use but one can end up spending too much with this line of credit. If you are paying off other debts such as credit cards ampersand autos it might make sense to get a standard fixed rate 2nd mortgage where you get the lump sum at closing to pay off all debts and then you pay on that mortgage along with your first until it’s paid off. You won’t have the ability to pull money whenever you think you need it. On the flip side of that, if you have income that comes in large quantities and is sporadic or not stable. This type of loan might be used as a cushion for the times in-between the checks.

A HELOC is a far superior debt device than using a credit card or financing a car/boat/ RV purchase. One of the many advantages to using a HELOC is that the interest expense is tax deductible. Essentially you are saving 25-35% on every interest dollar as it is deducted from your income when you do your year end tax preparations.

Many HELOCS today offer a credit card which can be used at your favorite stores and restaurants.

Usually the rate on the Heloc is the prime rate plus a margin.

A HELOC is traditionally based on the prime rate and a margin is added to reflect the true rate to be paid by the borrower. HELOC’s may offer a initial lower rate (Teaser rate) for a specific time period. When the defined time period has expired the rate will adjust to prime + margin.

HELOC(s) or Home Equity Line(s) of Credit are very popularly used as the “20″ in an “80-20″ or 80/20 piggyback mortgage strategy.

A Home Equity Line of Credit can also be used to purchase the property or as a first lien on the property. The HELOC can be used to payoff or consolidate debt, personal use, or just to have.

A home equity line is a revolving credit line tied to the equity in your home. Most home equity lines use the prime rate as a base for setting interest rates. For example, you hear lenders describe rates as prime + zero or prime + 1. This means the borrower will pay monthly interest according to the Prime Rate (lets use an example prime rate of 5.00%) plus a margin. In this case, prime + zero would equal an interest rate of 5.00%, or in the case of prime + one it would be 6.00%. Additionally, most home equity lines have interest only payments.

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