Rate cuts and mortgages - Trading-Lab

breakout · #1 01-30-2008, 07:43 PM

I was wondering how long it takes for existing mortgage rates to adjust to a new FED rate cut. Is there some kind of delay? I heard several people say their mortgages were not really affected at all by the recent 75 bps cut. was wondering how the whole thing worked.

thanks

aiki14 · #2 01-31-2008, 04:32 AM

Most ARM's (adjustable Rate Mortgages) in the US are tied not to the FED funds rate, or even the Prime rate, but the LIBOR (London Interbank Offered Rate). So the delay is indeterminate since they are technically unrelated. The libor rate has been steadily trending down over the last few months though.

The reset crisis is not really related to these rates, but to the fact that sub prime borrowers were offered very low "teaser" rates that reset to a rate well above the rate offered to prime borrowers. Some may go from 2 or 3% to 9% upon reset which might change a payment from 800/mo to 2100/mo. Combined with the value of the house being lower than when the loan was originated, there are in some cases no way out other than default and bankruptcy.

breakout · #3 01-31-2008, 08:13 AM

interesting stuff. I didn't know ARMs were tied to the LIBOR. I think most people in the US believe their mortgages are tied to some FED related rate too.

what do you mean by "teaser" rate?

aiki14 · #4 01-31-2008, 10:57 AM

Quote:

Originally Posted by breakout

interesting stuff. I didn't know ARMs were tied to the LIBOR. I think most people in the US believe their mortgages are tied to some FED related rate too.

what do you mean by "teaser" rate?

A teaser rate is a very low rate used to get a buyer to sign on. It was used heavily by CFC and others to lure in the sub prime clients. Folks figured since their house would increase in value by the time of reset they could refinance and no harm done, when it didn't they were or are stuck.

I, Deviant · #5 01-31-2008, 04:34 PM

Quote:

Originally Posted by breakout

I was wondering how long it takes for existing mortgage rates to adjust to a new FED rate cut. Is there some kind of delay? I heard several people say their mortgages were not really affected at all by the recent 75 bps cut. was wondering how the whole thing worked.

thanks

Many ARMs are tied to the LIBOR, and many institutions have their own pricing committees.

I work in mortgages for a credit union and we price "independently" from the Fed....

However, most banks/credit unions are going to do their best to remain competitive, so if a few start cutting rates, then the rest probably will too, if they can afford it.

Rates are the lowest they've been in a while if you're thinking about refinancing or buying. You can't go wrong with rates how they are right...at least you're getting a better rate than most people for at least the past year or so.

Good luck.

I, Deviant · #6 01-31-2008, 04:36 PM

Also remember to check the APR against the interest rate to see if they're trying to charge you discount points or origination fees. Many times a bank will quote you a rate and forget to mention they are charging discount points to give you the rate.

Leth · #7 01-31-2008, 05:36 PM

Good post Deviant...its nice to have an insiders perspective.

BlueChips · #8 02-01-2008, 12:01 PM

some additional info on the subject

http://finance.yahoo.com/personal-fi...pIODoku8u7YWsA

When the Federal Reserve meets and changes rates, we all have questions: What does it mean to me? Will my mortgage rate go up or down? Is this a good time to refinance? Bankrate is here to help. We've looked at five categories -- mortgages, home equity loans, auto loans, credit cards and certificates of deposit -- to determine if the Fed's moves made you a winner or a loser. Here's a look at mortgages:

Mortgages

Winner: Bargain hunters and ARM holders
The Federal Reserve's decision to substantially trim the federal funds rate for the second time in little more than a week doesn't necessarily mean mortgage rates are going down. In fact, mortgage rates often rise following a Fed rate cut, so it's impossible to guess where they are headed from here. However, mortgage rates recently sank to their lowest level in nearly four years, making this a great time to secure a loan at a very attractive price.

Lower rates are a major boon to people with adjustable rate mortgages whose rate is scheduled to move much higher soon.

A combination of sinking mortgage rates and plunging home prices also makes this a great time to consider buying a home, especially if you are looking for a bargain and intend to keep the home for the long haul.

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#1 01-30-2008, 07:43 PM
breakout Member Join Date: Jun 2007 Posts: 63	Rate cuts and mortgages I was wondering how long it takes for existing mortgage rates to adjust to a new FED rate cut. Is there some kind of delay? I heard several people say their mortgages were not really affected at all by the recent 75 bps cut. was wondering how the whole thing worked. thanks

#2 01-31-2008, 04:32 AM
aiki14 Member Join Date: Jan 2008 Location: Philly Burbs, PA Posts: 82	Most ARM's (adjustable Rate Mortgages) in the US are tied not to the FED funds rate, or even the Prime rate, but the LIBOR (London Interbank Offered Rate). So the delay is indeterminate since they are technically unrelated. The libor rate has been steadily trending down over the last few months though. The reset crisis is not really related to these rates, but to the fact that sub prime borrowers were offered very low "teaser" rates that reset to a rate well above the rate offered to prime borrowers. Some may go from 2 or 3% to 9% upon reset which might change a payment from 800/mo to 2100/mo. Combined with the value of the house being lower than when the loan was originated, there are in some cases no way out other than default and bankruptcy. __________________ I read somewhere that 77 per cent of all the mentally ill live in poverty. Actually, I'm more intrigued by the 23 per cent who are apparently doing quite well for themselves. --Jerry Garcia The idea is to try to give all the information to help others to judge the value of your contribution; not just the information that leads to judgment in one particular direction or another. --Richard P. Feynman

#3 01-31-2008, 08:13 AM
breakout Member Join Date: Jun 2007 Posts: 63	interesting stuff. I didn't know ARMs were tied to the LIBOR. I think most people in the US believe their mortgages are tied to some FED related rate too. what do you mean by "teaser" rate?

#6 01-31-2008, 04:36 PM
I, Deviant Junior Member Join Date: Jan 2008 Posts: 14	Also remember to check the APR against the interest rate to see if they're trying to charge you discount points or origination fees. Many times a bank will quote you a rate and forget to mention they are charging discount points to give you the rate.

#7 01-31-2008, 05:36 PM
Leth Super Moderator Join Date: Oct 2007 Posts: 621	Good post Deviant...its nice to have an insiders perspective. __________________ Nothing is more difficult than the art of maneuvering for advantageous positions. - Sun-Tzu Trade with the trend, Ride winners, Cut losers, Keep bets small, Use Stops - Old School

#8 02-01-2008, 12:01 PM
BlueChips Member Join Date: Jul 2007 Posts: 49	some additional info on the subject http://finance.yahoo.com/personal-fi...pIODoku8u7YWsA When the Federal Reserve meets and changes rates, we all have questions: What does it mean to me? Will my mortgage rate go up or down? Is this a good time to refinance? Bankrate is here to help. We've looked at five categories -- mortgages, home equity loans, auto loans, credit cards and certificates of deposit -- to determine if the Fed's moves made you a winner or a loser. Here's a look at mortgages: Mortgages Winner: Bargain hunters and ARM holders The Federal Reserve's decision to substantially trim the federal funds rate for the second time in little more than a week doesn't necessarily mean mortgage rates are going down. In fact, mortgage rates often rise following a Fed rate cut, so it's impossible to guess where they are headed from here. However, mortgage rates recently sank to their lowest level in nearly four years, making this a great time to secure a loan at a very attractive price. Lower rates are a major boon to people with adjustable rate mortgages whose rate is scheduled to move much higher soon. A combination of sinking mortgage rates and plunging home prices also makes this a great time to consider buying a home, especially if you are looking for a bargain and intend to keep the home for the long haul.