In an effort to avert financial tragedy worldwide, the Federal Reserve, European Central Bank, and four other central banks reduced interest rates on October 8^th. The American stock market remains in a funk, however. Unemployment is up and consumer confidence is down.

But in finance, the same circumstances that produce hardship can also create opportunity. The S and P index has dropped over 30% so far this year, but there is one bright spot in the dreary economic landscape: lower mortgage interest rates. So, while people with heavy stock portfolios must wait for better times, those who want to refinance their home loans can strike now.

Lower Rates Worldwide, Lower Mortgage Rates at Home

The Fed reduced its benchmark rate to 1.5%, and some analysts believe that it will go still lower. Decision makers are also working to loosen up credit markets to stimulate the economy. This should have the immediate effect of lowering credit card and other short-term interest rates. In addition, interest rates on 30-year-fixed-rate mortgages, which averaged 6.26% on August 29, have fallen to 5.8%. The .46% difference translates to a difference of $123.49 per month on a Fannie Mae conforming loan of $417,000.

Homeowners Who Can't Refinance May Benefit Also

Homeowners with adjustable rate mortgages may find their next ARM rate adjustment less painful. In fact, their rates may go down. So, even borrowers who lack the equity needed to refinance to a fixed rate mortgage may catch a break, at least temporarily.

Pulling the Trigger on a Refinance

While mortgage interest rate fluctuations have lenders changing their rate sheets several times a day, the overall trend has been lower. Experts say that investors who have taken a beating in the equity markets may want to recoup some of those losses by refinancing to better terms. Given the unstable nature of interest rates in the current economic climate, homeowners would be smart to get preapproved for their refinances. Then they are positioned to lock in and close quickly when rates dip.

Not the Time to Prepay Mortgages

Certified Mortgage Planning Specialist (CMPS) and chairman of the CMPS Institute Gibran Nicholas said in a Bloomberg.com update that consumers should "think twice" about paying extra on their mortgages for now. Putting extra money into a mortgage will tie it up--and in the current credit climate it may impossible to get it back if needed. Mortgage specialist Dan Green of The Mortgage Reports recommends that homeowners who wish to pay off their home loans early invest the money elsewhere until they are ready to retire the entire mortgage. That way, the money is available for emergencies if needed.

Home Equity Lines of Credit: Use Them or Lose Them

Nicholas also recommends that homeowners with home equity lines of credit (HELOCs) max them out and put the money in a bank account. With lenders moving in record numbers to shut down or restrict these accounts, a home equity line isn't guaranteed. "The safer thing to do is to move money to a place where you can control it."

While the economic turndown is sparking concern worldwide, there is always a silver lining according to Dave Burrows, president of Crescent Mortgage in Arlington, Virginia. "If we're going into a recession, that will be good for rates. If we're getting hit on everything else, they'll have to keep rates down."

Sources

Bloomberg.com

Fed, ECB, Central Banks Cut Rates (Update 7)

The Mortgage Reports

Times Online