Fed Cuts Rates Drastically!

NEW YORK (CNNMoney.com) — The Federal Reserve slashed two key interest rates by three-quarters of a percentage point Tuesday following an unscheduled meeting, citing continued concerns about a weakening economy and turmoil in the financial markets. The Fed lowered its federal funds rate, which impacts how much consumers pay on credit card debt, home equity lines of credit and auto loans, to 3.5 percent from 4.25 percent. The rate cut came more than a week before the Fed’s next regularly scheduled meeting, a two day session that concludes on Jan. 30. Some market observers think the Fed will cut rates again at this meeting.

The Fed also lowered its discount rate, which is what it costs banks to borrow directly from the central bank, by three-quarters of a point, to 4 percent. This was the biggest rate cut by the Fed since October 1984. And it was the first cut between regularly scheduled meetings since a half-point cut on the day the market reopened following the September 2001 terrorist attacks.

In response to these cuts lenders have rolled out some aggressive pricing on conforming 15 and 30 year fixed rate loans. The 30 year rate has dropped into the lower 5% range and the 15 year fixed has been flirting with the upper 4’s. I believe that, if the Fed does indeed cut rates again at their next meeting, which has been introduced as a possibility, then we could see another refinance boom. It may not be on the magnitude of the one in 2003 and 2004, simply because there are fewer lenders and tighter guidelines. But it would be an opportunity for anyone who missed out on refinancing then, or for people who have bought since then, to take advantage of the lower rates.

As an example, we just locked in a 15 year fixed rate mortgage for a client here in Flower Mound that we did a 30 year fixed loan for 2 years ago-his payment will basically stay the same because of the difference in the rate but he will be cutting 13 YEARS off of his note! In this Dallas real estate market, which, though stable, has been a bit flat, these rate reductions should help spur the purchase market as well.

Craig Pollard is a mortgage professional and owner of Texas Mortgage Team. He specializes in the Dallas Fort Worth area and is a frequent voice on Texas Home Central’s blog. Craig can be reached at CPollard@Texasmt.com or 972-317-9900