War and your mortgage: the end of low rates and high property values?

On March 18th the Federal Reserve left their target for overnight interest rates unchanged but signaled that they are prepared to cut rates if the war with Iraq disrupts world financial markets.

While the overnight rate has no immediate effect on mortgage rates it is often looked upon as an indication of the overall condition of our economy. As such, a cut in overnight rates can often trigger a response in equity and bond markets that can lead to lower mortgage rates. However, the recent Federal Reserve announcement coupled with a wartime rally on equities has taken its toll on mortgage rates to the tune of about 25 basis points.

So how does one determine if now is the time to refinance or sell? Ryan Addis, a Vice President and Principal of Western Pacific Mortage Corp., had this to say, "Rates are often a source of confusion for customers. As far as property values are concerned, we still have a huge shortage of housing in the valley, which increases demand, and plays a larger effect on values than rates. As values and interest rates rise, adjustable rate programs at rates lower than fixed mortgages will contribute a larger part to the overall affordability of housing."

In regards to refinancing, Mr. Addis states that, "Often clients are looking for at least a one percent reduction from their current 30 year fixed rate vs. today's 30 year fixed rate. This simple approach often misdirects borrowers from optimized savings.

Today's mortgage programs can play a much more significant role in the overall financial plan of families. Even if rates increase on the 30 year fixed, a 5 year fixed rate program will not only have a better rate, but it may also better meet the needs of the family. Higher net worth individuals may want to refinance and take advantage of the low cost capital by cashing out to get a second home.

Depending on the family's goals, these high net worth individuals may be better served with the same interest rate they currently have but on an interest only option. This plan allows the borrower to retain their write off and to reinvest the difference on rebounding stocks to make up the losses in their portfolios."

Mr. Addis goes on to point out several strategies his firm offers as a means of financial planning vs. the standard "off the shelf" bank and Internet loans available.

This article was provided by Western Pacific. For more information on the strategies described in this article, contact Western Pacific's consultants directly at 1 (800) 537-WEST.