The Federal Reserve recently announced that it intended to keep “interest rates” low through at least mid-2013. This unprecedented statement shocked the markets and helped drive mortgage rates down to match historic lows. As investors digested this information, many concluded the Fed is essentially stating that they believe our economic growth will remain stagnant for some time. Although the markets appreciated the transparency of the Fed’s statement and assurance that lending rates will remain low, it was a sharp contrast to prior predictions that our economy would be at a healthy growth rate by the end of 2011. The acknowledgement that our economic recovery has been “significantly slower” in the first half of 2011 than previously expected was more in line with what many on “Main Street” have been saying all along.

How Will this Decision Impact Mortgage Rates?

There are two interest rates that are controlled by the Federal Reserve – the Fed Funds Rate (a lending rate at which banks with deposits at the Federal Reserve lend money to other banks overnight) and the Discount Rate (the interest rate that an eligible depository institution is charged to borrow short-term funds directly from a Federal Reserve Bank). Both of these are very different from mortgage rates. A mortgage rate can be in effect for 30 years while a rate set by the Fed can change from one day to another. Therefore, this recent statement by the Fed does not guarantee that mortgage rates will stay in current ranges until mid-2013, only that it is likely short term rates will remain at current levels for the next two years (home equity rates, car loan rates, credit card rates, etc.).

One of the greatest determining factors in the direction of mortgage interest rates is the rate of inflation. Being that mortgage rates are set based on the price of a mortgage backed security (a bond sold to investors that is backed by mortgage notes), inflation is the arch enemy of any type of fixed income note or bond. Therefore, as inflation increases, mortgage rates will move higher regardless of how low short term interest rate are. In fact, if the Fed continues to hold short term interest rates low in the face of inflation, mortgage rates will increase further. A failure to increase short term rates in an inflationary environment will be viewed as a lack of effort by the Fed to fend off inflation, and long term rates will be the victim.

What Action Should Each Homeowner Take?

One primary benefit of the current low interest rate environment is the opportunity for homeowners to reduce the interest rate they pay on their mortgage. If you have a mortgage, or any other consumer debts, now is the time to have your mortgage reviewed by a professional who can advise you on the opportunities and determine if you should make a change to your home loan. If it is a wise decision, be mindful of the expenses to do the loan and the amount that most lenders add to your principal balance to refinance your mortgage. Any time a no-fee loan is available, that is likely the best solution to consider. Most of the loans we structure do not have any closing costs paid by the borrower and do not increase the principal balance of the mortgage. Our goal is to have homeowners reduce their mortgage liabilities, not add more to their balance. If you have any questions, or if you would like a no-cost mortgage review, call me at 801-501-7950 or e-mail me at mike@citycreekmortgage.com.

My City Creek Team, You guys just might be the best all-around mortgage team there is. Thank you for all you do. Love the way you do business and look forward to many more years. – Bryan Hurd RE/MAX Results

I heard a quote by Warren Buffet that said, “Be greedy when others are fearful, and fearful when others are greedy.” Thinking about the current Real Estate market we are in, one cannot pass up the incredible opportunity their is to purchase a home. With historically low interest rates and plenty of homes to choose from, NOW IS THE TIME! If you, a family member or friend, have been contemplating purchasing a home, we’d love the opportunity in assisting you or a loved one into the home of their dreams. I came across the following article written by Steve Harney, a mortgage and real estate professional that makes us realize the value in becoming a Homeowner. Enjoy the read!

“There seems to be a long held American belief currently under attack. For over two hundred years, homeownership in this country was a desire of almost every American family. Recently however, more and more people have been pontificating on the fact that owning your own home should never have been held in such high regard.

I don’t want to overstate my concerns as I know that the majority of Americasn still hold homeownership sacred. Trulia just did a survey showing 77% of those questioned still believe that owning a home is a part of the American dream. Yet, it does concern me that, while people are being forced from their home due to economic difficulties, some are claiming that homeownership never should have been the goal anyway.

Let me spend a few moments looking at the financial benefits of owning a home.

You may ask why I would make this argument today knowing that housing is in the midst of one of its worst times ever. Well, quite frankly, the last ten years have not treated the homeowner that badly. Obviously, people who purchased a home in 2006 and 2007 have seen their value depreciate over the last two or three years. But, real estate was never seen as a good short-term investment.

If we look at housing values over the last 10 years, we find that even through these tough times real estate has averaged over 50% return as an investment.

The chart below compares real estate to other investments over those ten years.

Then why this challenge today? Well, in the middle of the last decade, when prices were appreciating in some areas by as much as 20% annually, many got caught up in the belief that housing values should double every few years for the rest of time. That belief created all sorts of reckless behavior.

Many purchased homes well-beyond their financial means. Others decided that they would gamble on future values and interest rates by taking exotic mortgages to allow them to purchase a McMansion and worry about the cost at some later date. And others used their homes as an ATM, withdrawing their equity in the form of a home equity loan, in some cases, on an annual basis.

Previous to this, homeowners realized that a house was a home first and then a pretty good long-term investment. They might have borrowed against the house to put a child through college, finance a wedding, or pay for medical bills.

In the last few years however, people regularly refinanced to buy “new toys” (a new car, a boat, matching ATVs, etc.) Or, if it was for a medical procedure, it would just as likely be voluntary cosmetic surgery as a life saving operation.

I realized that tere were some people who were caught in difficult situations and others who got terrible advice from people they trusted. Their current situation is no fault of their own. My heart goes out to those people.

My hope is that, in these difficult times, the same people make sure they get good counsel. For example, I hope people think long and hard before they willfully default on their mortgages. They should try a modification first and, if that is unsuccessful, they should look for assistance in doing a short sale. A short sale will allow them to rebuild their credit more quickly, and enable them to purcahse a home again in half the time it would take if they go through foreclosure.

For over 200 years, Americans were eager to purchase property because they knew that on a long-term basis it would create wealth. That concept is alive and well in this country even today. For those who don’t believe this, save this blog post and we’ll revisit it in ten years.

Steve Harney