Low Interest Rate Courage

27 May 2010

Approximately 2 million homeowners, a majority being in minority neighborhoods, are at risk of losing their homes, either through default or by foreclosure.

The housing bubble encouraged homeowners to apply for Adjustable Rate Mortgages (ARMs). New homeowners were able to purchase zero dollar down properties, whilst existing homeowners re-financed, either to upgrade their homes, or spend the cash on luxury items.

However, a majority of those homeowners with poor credit signed up for adjustable rate sub-prime loans (a higher cost loan), now those loans have been reset to higher rates of interest, and it is proving incredibly difficult, if not impossible, for those homeowners to meet their payment schedules.

The housing market turmoil is affecting the financial markets, and the broader economy. Former Federal Reserve Chairman, Alan Greenspan, has stated that he did not realize the potential damage sub-prime mortgage lending to borrowers with poor credit could do to harm the U.S. economy.

How could the head of Americas central bank (the Federal Reserve), the most powerful economic planner in the world for almost 20 years, not have realized that cold, hard fact? Why the Chairman would have had the responsibility (twice a year) to raise, lower, or keep the level of U.S. interest rates the same is an interesting question, considering that we have a market economy that is supposed to do that!

Lowering interest rates makes the future more valuable relative to the present; raising interest rates makes the future less valuable. More people in the economy focus on the future when it is seen as being more valuable, thus more action is taken that affects the future: construction, research funding, and the building of factories to produce more goods. When the interest rate is lowered it shifts the economic attention and focus from the present to the future.

Low interest rates encouraged the housing boom; helped the faltering U.S. economy function. Unfortunately, those low interest rates fostered hope in borrowers with poor credit, spurning a high driven sub-prime market.

Could the Federal Reserves (mis)management of the housing boom been handled any differently? Perhaps interest rates were left too low for too long, and lending practices were not regulated efficiently?

Now its time for lenders to help borrowers restructure their mortgages, not an easy fix, but necessary in order to prevent a downward spiral.

Your Money Matters by Carl Hampton
From the Author of From Credit Despair To Credit Millionaire.

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Adjustable Rate Mortgages Interest Rate Strategy

18 November 2009

Over the last few years, many people squeezed into new homes using adjustable rate mortgages. With interest rates going up, you now need a new interest rate strategy

Adjustable Rate Mortgages ARMs

Adjustable rate mortgages carry a bit of a gamble for home owners. Essentially, you trade smaller interest rates and lower initial payments on the gamble rates will not increase over time. If rates stay low, you make out like a bandit. If rates increase, you need to consider your options to avoid getting stuck with a high interest rate loan and resulting cash flow problems from increased monthly mortgage payments.

For the last three or four years, adjustable rate mortgages have been offered with incredibly low interest rates. Many people used these low, low, low rates to buy homes that would otherwise be beyond their means. Starting in 2004, Federal Reserve Chairman Alan Greenspan started making noises about increasing money borrowing rates. He has followed through on these hints. Although mortgage rates arent tied directly to the Federal Reserve Bank, they are heavily influenced by it. As a result, many people are now facing tight finances.

Avoid Rising Rates

There are really only two solutions for avoiding the increase in interest rates on adjustable rate mortgages. The first strategy is to immediately convert to a fixed rate mortgage product. Fixed rates are still at historic lows when compared to rates offered over the last 50 years. By flipping to a fixed rate, you will be able to solidify your budget and finances since you will know exactly what you have to pay each month. If rates decrease in the future, you can always try to flip back to an adjustable mortgage loan.

Unfortunately, some home owners are simply going to have to face the fact they lost one the interest rate gamble. Typically, this will occur when you realize you simply cant afford to make the monthly payments required by getting a fixed rate loan. In such a situation, you are going to have to sell your home and downsize. In most situations, it is better to do this now since youve probably built up a sizeable chunk of equity over the last few years and want to avoid a loss of that equity as the market cools down. While this may sound like a disaster, it really isnt. Yes, you have to downsize, but you should still have built up a chunk of equity.

Interest rates are going up whether you want to acknowledge it or not. The time to deal with your adjustable rate mortgage is now, not when you straining to make payments.

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