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What’s Next for Mortgages, Consumers?

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By Chris Kissell

RISMEDIA, Oct. 13, 2008-(Bankrate.com)-When the Federal Reserve meets, we all have questions: What does it mean to me? Will my mortgage rate go up or down? Is this a good time to refinance? Bankrate offers help. We’ve looked at five categories-mortgages, home equity loans, auto loans, credit cards and certificates of deposit-to determine if the Fed’s moves made you a winner or a loser. Here’s a look at mortgages:

Winner: Homeowners with adjustable-rate mortgages

The Federal Reserve’s half-point emergency rate cut may not have any affect on mortgage holders. Changes in the federal funds rate do not directly influence the direction of mortgage rates.

However, Fed rate cuts may have more indirect impacts on some mortgage rates, particularly those associated with adjustable-rate mortgages.

Many ARMs are closely pegged to the London Interbank Offered Rate, more commonly known as LIBOR. When the Fed cuts the federal funds rate, LIBOR rates usually decline correspondingly.

During times of financial stress-such as we are experiencing now-this relationship often breaks down, and the spread between the federal funds rate and LIBOR actually tends to widen.

If that trend reverses-and LIBOR rates drop back closer to the federal funds rate-the Fed’s latest rate cut would be a boon to many homeowners with ARMs. Homeowners with these mortgages could expect to see their monthly mortgage payment decline the next time it resets.

Loser: Consumers looking for instant discounts on fixed-rate mortgages

Cuts in the federal funds rate do not directly impact fixed-rate mortgages. So if you’re shopping for a fixed-rate mortgage, don’t expect the Federal Reserve’s surprise rate cut to send mortgage rates lower.

They may fall. Then again, they may rise.

Take action

The Federal Reserve’s emergency rate cut will not directly impact mortgage rates. Fed actions change the federal funds rate, which is not directly correlated to mortgage rates.

As a result, consumers should not make decisions about their mortgages based on the hope that the Fed’s latest emergency rate cut will send mortgage costs plummeting. Mortgage rates often rise after a Fed rate cut. But they could fall just as easily.

For more information, visit www.bankrate.com.

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