Monday, March 03, 2008

Understanding Interest Rates

We keep hearing about changing interest rates and the government lowering the prime rate but what does that really mean for the buyer. Well according to my friend and Mortgage Broker Extraordinaire Brian Forrester with TriCounty Mortgage this is how it all really works.

When the FED lowers the FED funds rate, it lowers short term rates like the prime rate, which is used for:
· Car loans
· Boat loans
· Home equity lines of credit.

Long term rates move up or down in conjunction with bonds (also known as mortgage backed securities). One of the main reasons bond interest rates move up or down is related to fears of inflation. If the FED says inflation is coming, rates will rise to compensate. When the FED lowers their interest rates, this is seen as an inflationary move. This is because a rate decrease is supposed to spur more spending because of the cheaper costs of money.

So what does this really all mean to those Buyers out there that are waiting for prices to drop further to buy their dream home................while home prices may drop a little bit further, it is likely that these decreased prices will be accompanied by increased financing costs due to rate cuts by the Fed. This means that any money saved on paying less for a house in a few months time will be offset by Buyrs having to pay off their mortgage at a higher interest rate making “playing the waiting game” a waste of time (and very little fun).

This rate increase isn’t just speculation. Just a couple of weeks ago, in early February, the fixed mortgage rate jumped a full half-percent, making it the fastest rate increase in 20 years.

So what we are saying here Buyers is it is time to get off the fence as we like to say. Now is the time to buy if your are obviously in the position to do so. Prices are significantly down, competition in what is selling is fierce, and interest rates are still good. Now is the time to Buy!

And for all you sellers out there, remember price your home properly, get it in great condition, keep it neat and clean, wash off those smudge marks, (ever try a Magic Eraser on walls??? but I digress!)..............and be ready for those really smart Buyers who have done their homework and are ready to go!

Win the Day!