For Home Buying California

The Federal Open Market Committee adjourns from its 2-day meeting at 2:15 P.M. ET today.

It’s widely expected that the Ben Bernanke-led FOMC will reduce the Fed Funds Rate by a half-percent to 0.500 percent.

Fed Funds Rate cuts are meant to stimulate the economy by lowering borrowing costs for businesses and consumers; interest rates on business credit lines and consumer credit cards are directly tied to the benchmark rate.

However, it won’t be what the Fed does today that will be as important as what the Fed says. And the markets are listening closely.

See, this FOMC meeting was originally scheduled to last 1 day but on November 20, it was extended to 2. Presumably, the extra day was meant to give the FOMC a chance to review its options, but now it has the markets expecting “something big”.

Wall Street wants Bernanke to outline credit-extenstion plan for banks, businesses and consumers. It wants the Fed to bolster markets to prevent the recession from become a depression. It wants action. Anything short of an explicit plan should push traders into ultra-safe U.S. Treasury bonds and that should lead mortgage rates higher.

If you are floating a mortgage rate today, it may make sense to lock prior to the Federal Open Market Committee’s press release. Expect volatility beginning around 2:00 P.M. ET today.

Mortgage markets improved last week, riding a steady stream of negative news into its best levels of the year.

Day-to-day, mortgage rates priced across a very wide range, but managed to close out the week lower overall.

Mortgage rates improving on “bad news” is a break from the trading patterns of September and October. Back then, even the slightly evidence of a recession caused mortgage rates to soar.

Now, however, markets have accepted economic weakness and have started to look to the future. Not even sagging retail sales and the rising ranks of the unemployed could quell market optimism.

Indeed, the incoming administration may be leading the sudden sentiment shift; its stimulus package is expected to top $1 trillion over the next 24 months and put thousands of unemployed Americans back to work. The widespread press coverage of this story may be one reason why Consumer Sentiment rose off its all-time low, despite the economic evidence that tougher times may still be ahead.

So, as markets shift their attention away from fundamentals and towards the government, mortgage rates are benefiting and refinance activity is gaining steam.

This week, the government should be the top story again. On Tuesday, the Federal Open Market Committee will adjourn from its 2-day meeting and is widely expected to lower the Fed Funds Rate by a half-percent to an all-time low of 0.500 percent. This move, too, is meant to stimulate the economy.

But it won’t be what the Fed does that matters; it will be what the Fed says.

In the 2:15 P.M. press release, Fed Chairman Ben Bernanke is expected to outline measures by which the Federal Reserve will stabilize the economy. If markets consider the moves to be “enough”, stock markets should soar and mortgage rates should suffer. However, there may be specific verbiage for providing mortgage relief, in which case, mortgage rates would fall.

Other noteworthy data scheduled for this week include the Cost of Living Index and Housing Starts, but neither should matter much to mortgage rates. For now, it’s all eyes on the government.

A mortgage is a contract between a bank and borrower, defining the terms by which a home loan must be repaid.

The paperwork, signed by both parties, includes provisions for things like:

• The interest rate
• The length of the loan
• The amount of money to be borrowed

But, like all loans, a mortgage loan can be paid off at any time. So, when market interest rates fall, homeowners will often exercise their right to an “early payoff” by securing a new loan that pays off the old one.

This process is most commonly known as a refinance.

A refinance is the changing of the loan terms against a property, often for a better interest rate or a lower monthly payment. When the refinance process is complete, the original lender’s loan is paid in full using the money from the new lender’s loan and the former’s relationship is officially terminated.

There’s no rule against how many times a person can refinance, nor is there an easy way to determine whether or not a refinance makes sense. In general, if you can reduce your monthly payment while limiting your closing costs, to refinance is a smart decision.

However, there are other reasons to refinance, too, including:

1. To convert from an ARM into a fixed rate mortgage (or vice versa)
2. To extract equity for paying off third-party debts or for cash
3. To extend a loan from 15 years to 30 year for payment relief

Because there are fewer third-parties involved with a refinance, it’s often simpler and less expensive than a comparable purchase transaction. The paperwork stack is often smaller, too.

It’s the age-old question for home buyers in need of a mortgage:

Which is better: Fixed or ARM?

Historically, the answer has hinged on a homebuyer’s desire to meet one of two mutually-exclusive mortgage financing goals:

1. Get low mortgage payments for better cash flow
2. Get long-term payment stability for better budget planning

But because of government intervention and lingering questions about the economy, fixed-rate mortgages are now pricing cheaper than their adjustable-rate counterparts.

Based on today’s mortgage market, therefore, home buyers can get both.

Versus a comparable 5-year ARM, conforming fixed-mortgage rates are priced roughly 0.250 percent lower and have been over the past 19 days. The quarter-percent difference equates to $33 saved per month on a $200,000 home loan.

Mortgage markets are ever-changing so rates we can’t know if this pricing anomaly will last. But, while it does, the decision to choose Fixed over ARM is a lot simpler.

For most Americans, mortgage interest paid on a home loan is tax-deductible in the year in which it was paid.

With advance planning, therefore, homeowners can increase their 2008 tax deductions and limit their tax liability on April 15.

The key is to make the January 2009 mortgage payment before the New Year begins.

In making the payment in 2008, the payment’s mortgage interest is applied against this year’s tax deductions instead of next year’s. And lest you think you’re paying “in advance”, remember that mortgage interest is paid in arrears; a payment due January 1 accounts for interest that accumulated in December 2008 anyway.

Tax planning is a complicated issue and not all homeowners will qualify for mortgage interest tax deductions. Check with your tax professional before making tax planning decisions.

If you don’t have an accountant you trust, call or email me anytime; I’m happy to make a recommendation to you.