Homeowners facing resets on their adjustable-rate mortgages or hoping to refinance into less-burdensome loans may be the biggest beneficiaries of the Federal Reserve's surprise rate cut this week as mortgages continue to get cheaper.
As many as 2 million homeowners face ARM resets this year and declining interest rates hold out the promise of at least limiting the sticker shock of higher payments on loans linked to Treasury indexes used to calculate many adjustments.
Lower rates also will make it easier for homeowners to qualify for refinanced loans, mortgage professionals say.
"For anyone on the margin, this will provide some relief," said Richard Musci, vice president of Charles Schwab Bank. But he warned that for those already struggling or already behind on credit payments "the die has been cast."
The Federal Reserve's emergency interest-rate reduction of three-quarters of a percentage point brought the central bank's key lending rate down to 3.5% from 4.25%. It was the most aggressive one-time cut in more than two decades, and its bombshell nature underscored the Fed's worries that credit conditions for consumers and businesses are at a breaking point.
"Whenever you lower rates, it can't hurt the consumer," said Bernard Baumohl, managing director of the Economic Outlook Group. "The Fed never promised it could change things dramatically overnight. There's a certain timeline with a cut in rates of nine months to 18 months when the economy feels the benefits."
'Consumers should be able to afford more'
"Mortgage rates already have fallen and they still are falling," said Dave Loyst, vice president of retail lending at Stearns Financial in San Diego. "Every deal is a struggle, but we're still doing loans. I think this rate cut absolutely is going to help the real-estate market."
"This definitely will help the mortgage situation," Loyst said. "With rates falling, more people are able to qualify for refinancing and more people who were left out from buying homes before will be able to do so now."
Consider what's happened since September's rate cut for creditworthy Schwab borrowers. On Oct. 7, a 5-1 adjustable-rate mortgage of $350,000 carried a 6.52% interest rate, assuming a 20% down payment. (A 5-1 ARM gives borrowers a fixed interest rate for the first five years and then converts to a loan that adjusts annually after that.)
The rate this week for that same loan was 5.04%. That translates into an annual mortgage payment that's $5,100 cheaper, Musci said.
"This is the affordability piece," he said. "Consumers should be able to afford more (of their living and discretionary expenses) at these lower interest rates."
Now here's the gamble: Should consumers wait for what might be another cut in interest rates next week when the Fed holds its next regularly scheduled meeting -- and maybe even another cut at its March meeting -- or take the plunge now?
Get the paperwork started
But he warns that credit-lending standards are much tighter than they were two or three years ago when many borrowers took out their current loans, with full documentation of income required on nearly all loans.
"Don't go out and borrow money for the sake of borrowing money. But if consumers can consolidate and lower some credit-card debt, it probably makes sense to do so," he added.
Musci said those who want to refinance should get the paperwork started and look for lenders that offer a "float down" option that gives the borrower a one-time chance to lock in a lower rate should mortgage rates continue to fall in the wake of any additional Fed cuts.
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"Even though it costs money to refinance, rates have gone down so much that you're probably locking in rates at the bottom or close to the bottom," Musci said.
Even though mortgage rates may be low, some homeowners may have trouble refinancing if the value of their house has fallen, as has been the case in many parts of the country. But home-price patterns vary by locale.
In Boston, for example, home prices are starting to inch up again after falling sharply, but in Bakersfield, Calif., more fallout is expected. So borrowers will need to monitor their property appraisals.
This article was reported and written by Jennifer Waters for MarketWatch.
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