Real Estate Insights

Just what can the American consumer expect out of all the nonsense and media frenzy associated with one little interest rate controlled by that Ben Bernanke guy? Well, the Federal Reserve's continued stance on cutting the key interest rate, the Fed Funds Rate, comes from their fears that the US economy could potentially be facing a recession.

This is where the Fed comes in, they can control the tides of the money supply by increasing or decreasing one little interest rate. The resulting cuts or increases will then trickle down into the rest of the economy affecting everything form mortgage rates to credit card rates.

Here's a look at what these moves may mean for consumers — and what else to look out for amid the current economic turmoil:

Is now a good time to refinance my house?

It certainly could be for a lot of people.

Fixed-rate mortgages have been dropping since Christmas. The average conforming (loan amount of $417k or less) 30 year fixed is now 5.5 percent, and the average 5 year fixed is as low as 5 percent or even less. Just last week we saw the 5 year fixed rate mortgage drop below 5 percent for the first time since the spring of 2004.

Even though these rates have risen since last week, the current rates are still very low by historical standards. So if you have an adjustable rate mortgage that's going to reset, now would be an excellent to time to swap into a fixed-rate loan.

And for adjustable rate mortgages, especially for those loans that have converted form a short term fixed, the lower trend in interest rates will start taking some of the sting out of adjustable rate loans that are resetting higher. Those resets have been causing a lot of pain for struggling homeowners lately.

But, for most people, fixed-rate mortgages are still the way to go, because they offer peace of mind and permanent affordability. But, if the borrowers are planning on a short term use longer fixed rates could be drastically more expensive.

If you have been considering either a refinance or purchase, be sure and consult your mortgage broker for advice on what type of loan will work best for your particular financial situation. For additional information on choosing the right loan, adjustable or fixed, please download the following document: The Simple Facts Brochure.

What about car loans?

Car loan rates aren't really affected much by what the Federal Reserve does. And beyond that a low-interest rate environment doesn't make cars and trucks much more affordable. The best advice would be to shop around to get the best interest rates before you go to the dealership, and then brush up on your negotiating skills. You may want to try community credit unions and local banks and then compare their rates against what the dealer maybe offering.

How about the interest on credit cards?

Rates offered on credit cards are always relatively high. But they're falling and should continue to drop for a while. The average rate is 13.1 percent, down from 14 percent in December, when the Fed started cutting interest rates. There can also be a lag of up to 90 days before those lower rates are reflected in credit card statements.

Are more interest-rate cuts likely to occur?

The Federal Reserve's policy-setting committee, known as the FOMC, meets 8 times a year starting Jan. 29, and is responsible for determining whether or not to cut the interest rate. Currently it's widely believed that the Fed’s will continue to reduce rates well into 2008, and it is speculated they will again during their next meeting Jan 29 & 30th, perhaps by as much as one-half a percentage point. That would bring the Fed's main interest rate down to 3 percent.

Whether additional cuts follow depends on what happens in the broad economy, and, to a lesser extent, whether the financial markets continue to plummet. The Fed will be looking closely for signs of deterioration in the job market. If the economy starts to lose jobs rather than generate new ones, the Fed may be cutting rates for the foreseeable future.

Any particular advice for people nearing retirement age?

Whether times are good or bad, financial advisers have the same fundamental advice for people nearing retirement age: Their investments should be less risky than when they were younger. Their portfolios should be weighted more to bonds and fixed-income assets, such as CDs and money market funds, than to stocks. In a period of market volatility, the risks (and potential rewards) of stocks become even more pronounced. So if you need a predictable source of income within a few years, your exposure to the stock market should be limited.

What about the White House and Congress? Are they still working on a stimulus plan –- and is that going to put money in my pocket?

There's an unusual sense of urgency in Washington to get some kind of stimulus package passed. Congressional leaders and the White House would like an agreement in place before the president's State of the Union address on Monday. President Bush favors a plan that would send rebates of $800 to individual taxpayers and up to $1,600 to households, along with tax breaks for businesses to invest in new equipment.

Just about everyone in Washington, whether Democrat or Republican, favors some kind of quick rebate to taxpayers.

On the margins, there are differences between the parties — the White House package would do more to help businesses ramp-up hiring. Sen. Hillary Clinton, for example, favors more assistance to individuals in the form of extended unemployment benefits and help with heating bills. Democrats also want to send checks to lower-income workers who don't pay any income tax at all.

Another important proposal is the possible FHA reform bill being talked about lately. Although the House and the Senate both have their own versions, if there can be an agreeable combination we could see the conforming loan limits increased in the Bay Area, upwards of $700,000. If this passes, then more people will be able to purchase homes and consolidate their outstanding bills.

Conforming loans are easier to qualify for, offering more flexible guidelines and lower interest rates. The interest rate spread between a conforming loan amount and a jumbo loan amount can be as much as 1.5% right now.