Originally created 01/08/01

How Fed cut will affect mortgages



Some mortgage lenders believe the Federal Reserve's mid-week announcement that it would lower short-term interest rates will spur mortgage refinance activity and housing sales.

Carol McConkey, president of the Memphis Mortgage Bankers Association, speaks for many when she says the half-point drop in short-term interest rates will get some people's attention.

Other economists say the 30-year mortgage rate probably already had bottomed before the rate cut.

Mortgage rates are now at their lowest point since May 1999 as many investors had anticipated the Fed would act within weeks to boost a slowing economy. The rates have fallen to around 7 percent from 8.64 percent in May. For mortgage rates to move down further, the Federal Reserve would have to cut rates one more time, they say.

"The market was expecting the Fed to cut rates," says David Berson, chief economist for Fannie Mae, the No. 1 U.S. mortgage financier. "All this does is help validate the drop in mortgage rates already."

The market rate for a 30-year fixed-rate conventional mortgage loan was 7 percent with no extra points on Wednesday, the day of the Fed announcement. The rate for a 15-year fixed-rate was about 6.75 percent with no points.

Lower rates can mean significant savings or increased affordability.

For example, a homeowner paying an 8.5 percent rate on a 30-year fixed-rate loan for $112,400 can save about $116 a month, or almost $1,400 a year, by refinancing to a 7 percent rate.

The monthly payment of $864.26 for principal and interest at 8.5 percent would drop to $747.80 at 7 percent, McConkey notes. Closing costs to refinance a $112,400 loan with no points or fees would be about $1,550.

Doris Pillsbury of First Tennessee Home Loans expects refinance activity to increase because mortgage rates are "very attractive."

Candidates for refinancing include people with adjustable-rate loans who want a low fixed-rate loan, and people with 30-year loans who may want to reduce them to 15 years for significant long-term savings, Pillsbury says. "And there are still a lot of people with 8.5 percent to 8.75 percent loans who just haven't refinanced yet."

Virginia Green of the National Bank of Commerce's Mortgage Lending Division, said a lot of people had time off the week after Christmas and may have given some thought to refinancing. "A lot of people are so busy most of the time they don't take the time to think about it," she adds.

Kevin Ruby of Community Mortgage Corp. said now that the election and the holidays have come and gone, people are more likely to focus on buying a house or refinancing.

Jane Hardin of First Trust Bank for Savings says she expects mortgage rates to hold in a range of 6.75 to 7.25 percent through the winter.

The immediate reaction in the bond market to the Fed's announcement actually was an increase in bond rates, boding slightly higher mortgage rates. That, however, could be expected in the short term because when stock prices show significant upward movement, it is typical for bonds to move in the opposite direction.