Gufford's Jacksonville, FL Mortgage Blog

A good friend of mine sent me this photo today.  It has nothing to do with mortgages, but I had to share this.  It might take a little time to download, but it's worth the wait.  Thanks, Dena!

At their last meeting April 30, the FOMC (Federal Open Market Committee) of the Federal Reserve System cut the federal funds rate .25% to 2.00%.

The federal funds rate is the interest rate banks charge each other for overnight loans for cash to maintain their reserves mandated by the Federal Reserve.  This directly influences the prime rate reported by the Wall Street Journal's bank survey, which affects short term rates on deposits, credit card balances and other adjustable rate loans, as well as many other consumer products.  The 11th District Cost of Funds Index (COFI), which is the index on which many adjustable rate mortgages are based, is directly influenced by the overnight rate.

From a mortgage standpoint, the immediate effect of a reduction in the fed funds rate translates into a drop in interest rates on home equity lines of credit tied to prime.  When adjustable rate mortgages based on COFI change, of course those rates go down.

Okay.  What's the deal?  Why do rates change?  Why does the FOMC decide to lower or raise the rate that ultimately affects how much we as consumers pay for loans or make on deposits?

The FOMC changes the federal funds rate to promote economic growth while controlling inflation.

If the rate goes up, banks are less willing to borrow money to maintain their reserves.  This means they lend less and interest rates on their loans to businesses and individuals go up, which means less money is "on the street" and the economy slows.  Businesses making less cut costs in one way by reducing their work force.  Less jobs mean less payroll dollars on the street which means a slowing economy.  This ultimately affects housing because a slower economy causes home prices to drop.  As equity lessens, homeowners feel poorer and spend less which adds to a slower economy.  An economy that shows negative growth is in recession.

Conversely, if the fed funds rate goes down, the opposite happens. Banks lend more, housing improves, people spend more disposable income and the overall economy is stimulated.  However, the danger of too many dollars available means that one dollar doesn't buy as much.  This is inflation.

The FOMC's job is to maintain the balance of healthy economic growth while keeping inflation in check.  It's certainly not as easy or simple as I've tried to describe above, and considering the effects take time to "trickle down," the job is even more difficult.

I'm happy to announce that Ocean's Edge condominiums has taken me as a preferred lender!  This means I'm helping the staff at Ocean's Edge close loans as quickly and seamlessly as possible.  There's the common goal of making the experience of purchasing an Ocean's Edge condo an enjoyable and rewarding experience.

Ocean's Edge is Jax Beach's newest luxury condominium community offering the rarest of opportunities -- a chance to live the relaxed coastal lifestyle of your dreams in an ideal beach setting, all at a surprisingly affordable price.  From the beautiful clubhouse and attached summer kitchen leading out to the edgeless pool to the impeccably manicured grounds and beach access, Ocean's Edge is certainly a gem not to be overlooked.  Check out their website by clicking on the "Ocean's Edge" tab on the left side of this page or any page on my site, or click the link on the "Resources" tab located at the top of any page.  Come by and see me, and I'll introduce you to any of the onsite realtors who can show you this gorgeous property.

As usual, I'm always available to help you with all of your mortgage loan needs:  residential and commercial purchases, equity loans and lines, and refinances.  We have some cool stuff planned to help get the word out about Ocean's Edge--stay tuned!

I came across some good information recently about the current buyer's market:

• Rates have not been as low as they are today since 2001-2002.  Prior to then, it was 1973.  Yes, that's 35 years.
• During '01-'02 there was minimal inventory.  It was the height of the housing boom--homes were sold at higher than list price as soon as there was a sign in the yard.  This was certainly not a buyer's market.
• The last two buyer's markets were in the early 1980s and early 1990s.  Interest rates around 1980 were in the high -teens to over 20%.  In the early '90s, 11 or 12% was the norm.
• It follows that today is the best time to buy a house in decades.

What about refinancing?  Won't the rates go lower?  Maybe.  Then that begs the question:  Isn't the smart move to wait for that to happen?

My answer is it's a great time to refi.  Should you wait?  Not necessarily, and here's why:  In this buyer's market, we're seeing downward pressure on home values.  That comes with the territory.  Even though "equity" is a number on paper until you actually sell the property, it is real when it comes to figuring loan-to-value ratios.  Lower values mean higher LTVs.  This translates into added expense in mortgage payments when LTV is greater than 80% because of PMI or higher rates on seconds.  So, waiting for interest rates to go down while your home value declines could cost you more.  Or, with lending guidelines getting tighter and max LTVs getting lower, waiting could bump you out of even qualifying for a refi.

Using the equity in your home to obtain a lower rate while values are declining sounds counterintuitive, doesn't it?  It really isn't.  Taking advantage of the most equity you can on a refi means less cash out of pocket.  If you can save enough on your payment and you plan to be in your home for more than the next year or two while this cycle makes its turn, a refinance loan now is the smart move.

Every situation is unique.  I'll be happy to review yours and recommend your best course of action, whether it's "refi now" or "stay with what you have."