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Federal Reserve FOMC Announcement

Federal Reserve FOMC AnnouncementThe stage was set in high suspense for FOMC’s post-meeting announcement on Wednesday. As fall approaches, analysts and the media are looking for any sign of when and how much the Fed will raise its target federal funds rate. According to CNBC, some analysts were projecting two interest rate hikes before year end, but the truth of the matter remains unknown until the Federal Open Market Committee announces its intentions.

Meanwhile, reports of what Fed rate hikes will mean for consumers were released prior to the FOMC statement. Real estate analyst Mark Hanson said that a rate hike would “crush” housing markets, which continue to improve slowly in spite of the current 0.00 to 0.25 percent federal funds rate.

Last Friday’s report on June sales of new homes shows unpredictable progress in housing. Analysts estimated that new home sales would reach 550,000 units based on May’s reading of 517,000 new homes sold. June’s reading came in at 482,000 units sold.

FOMC Statement: Current Federal Funds Rate “Remains Appropriate”

The Federal Open Market Committee of the Federal Reserved announced as part of its post-meeting statement that it would not immediately increase the federal funds rate. The FOMC statement cited concerns over the inflation rate, which remains below the Fed’s goal of 2.00 percent. According to the statement, the FOMC will not move to raise the federal funds rate until the committee is “reasonably confident” that inflation will achieve the committee’s goal of 2.00 percent over the medium term.

No prospective dates for raising the target federal funds rate were given. The FOMC statement repeated language included in previous statements indicating that committee members anticipate that economic events could further postpone increases in the federal funds rate. The FOMC statement asserted that committee members continue to monitor domestic and global financial and economic developments as part of the decision-making process for raising the target federal funds rate.

FOMC members agreed that policy accommodation may be required “for some time” after the committee’s dual mandate of maximum employment and 2.00 percent inflation have been achieved. This suggests that FOMC members are not in a hurry to boost rates when economic uncertainty remains.

In terms of housing markets, the Fed’s decision not to raise rates likely caused a sigh of relief as rate increase would have caused consumer interest rates including mortgage rates to rise.

July 30, 2015 by · Leave a Comment

Understanding the Basics of How the Adjustable Rate Mortgage or ‘ARM’ Works

Understanding the Basics of How the Adjustable Rate Mortgage or 'ARM' WorksAs the 2009 recession fades into the sunset, the home buying market is showing signs of improvement in areas all over the United States. With more home buyers now entering the market, this becomes a good time to discuss one popular type of mortgage called the “Adjustable Rate Mortgage” or ARM.

What is an Adjustable Rate Mortgage?

An adjustable rate mortgage is a non-traditional home loan offered by lenders where the interest rate is tied to a specific rate index. The applicable rate on this type of mortgage is adjusted on an annual basis, usually beginning after the first 12 months. The rate index used is usually tied to one of the most popular indexes such as the London Interbank Offered Rate (LIBOR) or a cost-of-funds rate determined by the lending institution.

What Are Some Characteristics of an ARM?

ARMs are offered as a promotional option to help home-buyers purchase a home, beginning with an interest rate that is typically lower than normal markets rates. The loan provides for an adjustment period (the stated time-frames when the rate will be adjusted), the index to be used to determine rates, parameters on how the new rates will be determined at point of adjustment, and any caps related to the frequency and the minimum/maximum rates that will be charged during the life of the loan.

What Are Some Advantages of an ARM?

The primary advantages of an ARM begin with the borrower having access to a mortgage where the applicable interest rates are usually lower that those charged on fix-rate loans, which helps keep the monthly payments lower over the first couple years of the loan. This is particularly valuable to marginal borrowers who may need lower payments in order to qualify for a home loan. Also, many ARMs allow for principle prepayments without being charged a prepayment penalty.

What Are Some Disadvantages of an ARM?

The biggest issue related to an ARM in the unpredictability of the interest rate. During times of inflation, interest rate may escalate rapidly. This will result in a corresponding increase in related ARM rate, which might create payments larger than the borrower had envisioned. Consumers also need to be aware of potential rate errors or overcharges, whether intentional or not.

When Are ARMs Preferable?

The best time for a borrower to consider an ARM is if rates are high, but trending lower. This will keep the borrower’s payments lower over the life of the loan. Arms are also preferable if the borrower plans on holding the home for a shorter period of time. Finally, ARMs work well if the borrower wants to keep their initial payments lower in anticipation of high income in the future when larger payments are more feasible.

July 29, 2015 by · Leave a Comment

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