house.jpgAlthough it may seem that the interest rate on home mortgage prices are tied to the Fed’s announcements of lower interest rates, they really aren’t directly affected. The announcement can have an influence on these rates by allowing banks to borrow money from the Federal Reserve at a discounted rate. This savings may or may not be passed onto mortgage loan products, depending on the economic climate and what rate your mortgage product happens to be tied to initially. However, due to the loss of confidence in the housing sector, demand for home mortgage products has declined. This has more of a direct effect on the interest rate offered as banks compete to attract borrowers to their table. If the demand is high, you may end up seeing the reverse dynamic where the interest rate on home mortgage products can increase.

What to do With Lower Interest Rates

If you have a high adjustable rate mortgage, you may be wondering if you need to refinance at all. If the interest rate drops, your adjustable rate might drop too, depending on what index your mortgage product uses. Most people don’t have this type of luck, and are facing an upwards adjustment due to initial teaser rates that were set abnormally low to attract buyers. The expert opinion still sides with refinancing to a fixed rate mortgage if you intend to be in your house for an extended period of time - five years or more. A fixed rate evens your payments, is actually quite low in today’s market, and insulates you from further adjustment increases.

Tapping Your Home Equity

Another place that has become more favorable to explore, due to low interest rates, are home equity loans and home equity lines of credit. Although some regional home markets have stolen equity out from under recent home buyers’ feet, if you bought prior to market topping out and are looking to remodel, now the interest rates for these products are also lower. As long as you have sufficient equity, you can use this resource to remodel or add to your home. You do place your home at risk with these products as they are secured by your home, so be sure you can make the required payments on time and in full.

High versus Low Interest Rates

Some types of product that always seems to have high interest rates are credit cards and payday loans. The reason is that these types of loans are unsecured by any asset. It may be tempting to move unsecured debt from a credit card to a home equity line of credit, but many people do get in trouble with this maneuver. For one thing, they are now risking their home if they can’t make the payments on time. For another, many people begin to treat their homes like ATMs. Instead of paying back the old debt with the home equity loan or line of credit and establishing some discipline to forgo unnecessary usage of these resources, they instead build up a new balance on these products once again. This defeats the purpose of getting a lower interest rate with a home equity product because it becomes much more difficult to dig out of that debt and they also risk their home too. So, not all unsecured debt is bad, as long as it is not runaway debt.

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