By Didier Malagies
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When the Federal Reserve (Fed) cuts interest rates, it is usually intended to stimulate economic activity. Here's what typically happens when the Fed lowers its benchmark interest rate:
1. Lower Borrowing Costs
For Consumers: Lower rates make borrowing cheaper for consumers, particularly for loans such as mortgages, car loans, and credit cards. This often leads to increased spending and investment by consumers, which can boost economic growth.
For Businesses: Companies can borrow at lower rates to invest in new projects, hire more workers, and expand operations. Lower borrowing costs can encourage business growth and investment.
2. Increased Consumer Spending
Lower interest rates reduce the cost of borrowing, encouraging consumers to finance purchases, especially of big-ticket items like homes and cars. This increased demand for goods and services can help boost the economy.
3. Encouraging Investments
Stock Market: Lower interest rates can make stocks more attractive compared to bonds or savings, as the yield on safer assets decreases. This can push stock prices higher, as investors seek higher returns from equities.
Business Investment: Lower borrowing costs can prompt businesses to expand by purchasing new equipment, hiring more employees, or pursuing new ventures, which in turn stimulates economic activity.
4. Weaker Currency
Lower interest rates can weaken the U.S. dollar in international markets because investors may seek higher returns in other currencies. A weaker dollar makes U.S. exports more competitive abroad, which can help boost domestic manufacturing and the economy.
5. Stimulates Inflation
When borrowing becomes cheaper, demand for goods and services can increase, leading to higher prices. The Fed typically lowers rates when inflation is low or economic growth is sluggish. If demand rises faster than supply, inflation may increase, which is one goal if the economy is too slow.
6. Lower Savings Returns
Savings accounts, certificates of deposit (CDs), and other fixed-income investments typically yield lower returns when rates are cut. This can push savers to spend more or invest in higher-risk assets like stocks to achieve better returns.
7. Boost the Housing Market
Lower interest rates make mortgages cheaper, potentially driving up home sales and home prices as more people can afford to buy homes.
8. Employment Growth
Lower borrowing costs for businesses may lead to more hiring, as companies can finance expansions or projects at a cheaper rate. This can reduce unemployment rates and increase overall wages over time.
9. Risk of Overheating
If the Fed cuts rates too aggressively, it could lead to excessive borrowing and spending, which might cause inflation to rise too quickly, creating the risk of an overheated economy.
Why the Fed Cuts Rates
The Fed typically lowers interest rates during periods of economic slowdown, recession, or low inflation to encourage economic activity. Conversely, it raises rates when inflation becomes a concern or when the economy is growing too quickly.
In summary, a Fed rate cut is meant to stimulate the economy by making borrowing cheaper, encouraging consumer and business spending, and promoting investment. However, it can also carry risks, such as inflation and asset bubbles.
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Following the 10-year treasury yield, it has gone from 4.9 down to 3.64, the market is ahead of the Fed in anticipating a rate cut this month, so the drop in rates has already been baked in. When the Fed drops it will be a .25 or a .5 and the market will react to that drop in a positive or possibly a negative way.
Is it time to refinance your home? That is a great question, are you going to consolidate debt, cash out, or do a rate-term refinance. It is really a phone call to see where you are at and what makes sense for your financial planning. No one is going to sell you anything, really just look at the numbers and see if it makes sense.
We are heading down and nice to see some relief for a home purchase as well, a drop in rates of 1% makes a difference and we have dropped that already and I believe the probability of more to come.
Keep watching the 10 yr and see if we go lower
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An FHA (Federal Housing Administration) mortgage is a popular home loan option, especially for first-time homebuyers or those with limited down payment funds or less-than-perfect credit. Below are the pros and cons of an FHA mortgage:
Pros of an FHA Mortgage:
Lower Down Payment:
FHA loans typically require as little as a 3.5% down payment, making homeownership more accessible for buyers who may not have substantial savings.
Flexible Credit Requirements:
Borrowers with credit scores as low as 500–580 (depending on the lender and loan terms) can still qualify for an FHA loan. This is more lenient compared to conventional loans, which often require higher credit scores.
Higher Debt-to-Income (DTI) Ratios:
FHA loans allow for higher DTI ratios (up to 43%-50%) compared to conventional loans, which makes it easier for borrowers with higher levels of debt to qualify.
Available to First-Time and Repeat Buyers:
FHA loans are available to both first-time homebuyers and those who have owned homes before, as long as they meet the qualifications.
Assumable Loan:
FHA loans are assumable, meaning that if you sell your home, the buyer can take over your mortgage, which can be a selling point if interest rates rise in the future.
Refinancing Options:
FHA offers Streamline Refinancing, which allows current FHA borrowers to refinance to a lower rate with reduced paperwork and without requiring a new appraisal.
Cons of an FHA Mortgage:
Mortgage Insurance Premiums (MIP):
FHA loans require both an upfront mortgage insurance premium (1.75% of the loan amount) and ongoing annual mortgage insurance premiums (0.45%-1.05% of the loan balance). This can add significantly to the cost of the loan over time.
The MIP is required for the life of the loan if your down payment is less than 10%.
Loan Limits:
FHA loans have maximum loan limits that vary by region and property type. In high-cost areas, this limit might not be enough to buy a more expensive home.
Stricter Property Standards:
The home must meet FHA's minimum property standards, which may require repairs or upgrades before the loan can be approved. This can be an issue with older homes or fixer-uppers.
Potentially Higher Interest Rates:
While FHA loans are designed to help buyers with lower credit scores, borrowers with good credit may find lower interest rates and better terms with a conventional loan.
Not Ideal for Large Loan Amounts:
If you need a loan amount that exceeds the FHA loan limits in your area, you might be forced to look for alternative loan options like a conventional or jumbo loan.
Longer Closing Times:
FHA loans can sometimes take longer to close compared to conventional loans due to stricter underwriting and property inspection requirements.
An FHA mortgage can be a great option for those with limited savings or credit challenges, but it's important to weigh the long-term costs, particularly the mortgage insurance premiums, before deciding.
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First-time Homebuyers are able to purchase a home with a 2/1 Buydown at the wholesale lender's expense. If you purchase a home and the interest rate is say 6.375%, the 2/1 buydown allows you to pay 4.375% for the first year, then 5.375% the second year, and then 6.375% for the remainder of the loan
Normally the seller would pay the interest difference for year 1 and year 2, now the Wholesale lender will pay that expense so it is not a negotiating feature for you on the purchase of the home. It is paid for by your lender and does not have to go to the seller.
Elevated rates these past 2 years help to get the lower rate for a couple of years and with the probability of refinancing in that period of time
Always bringing you products that can benefit you on your home purchase adventure
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I have Helocs on primary, secondary, and now Investment properties.
How exciting to tap into the equity on your investment property without having to refinance the first if you have that nice low interest rate.
If you have a low interest rate, do the Heloc and see if the blended rate is lower than refinancing the first.
The time will come when you can refinance both of them when the rates really do come down in the future.
Thought it was pretty exciting to now have this product available to you
Let me know if I can help out and another way to get some cash from your home
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We know when the interest rates drop the following will happen
1. refinancing to a lower rate
2. consolidating debt into one lower payment
3. First-time home buyers will be coming out to buy
4. There will be downsizing of homes with the lower rates
5. There will be upsizing on homes with the lower rates
18 to 29-year-olds still living at home will be buying. With all that great news that also means there will be a lot more printing of money which will cause everything to go up in price, Things will be more expensive with Trillions more being printed
Time will tell and but a flurry of activity will take place when the interest rates do really drop down to the levels of 2020
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The Government is printing 1 trillion every 100 days, we are over 35 trillion in debt today, and we are spending 1/3 of the debt is interest payments of total revenue coming in, next year it will have 1/2.
so I feel the probability of rates coming down is great at some point down the road.
You can see the 10-year has come down from 5% to 3.81%, which is significant and the market is telling you that something isn't right
We have over 1.2 trillion in credit card debt, the time will come when refinancing will make sense, and downsizing or upsizing will make sense as well
I think when this happens the refinances will be incredible and also more homes will be on the market with active buyers. Definitely will be a game-changer
Refinancing and purchases are great now with the opportunity to refinance them down the road. I think prices will escalate again when this happens
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Whether to get flood insurance outside of a designated flood zone depends on various factors, including your location, property value, risk tolerance, and financial situation. Here are some points to consider:
Flood Risk Outside of Flood Zones: Even if you're not in a high-risk flood zone, flooding can still occur due to factors like heavy rainfall, clogged storm drains, or infrastructure failures. FEMA reports that over 20% of flood insurance claims come from properties outside of high-risk areas.
Cost of Insurance: Flood insurance is generally less expensive for properties outside of high-risk flood zones. Weighing the cost of the policy against the potential financial impact of flood damage is crucial.
Home Value and Investment: Consider the value of your home and personal belongings. If a flood could result in significant financial loss, insurance might be a prudent investment.
Climate and Weather Patterns: Changing weather patterns and increased frequency of extreme weather events can lead to unexpected flooding, even in areas not historically prone to it.
Peace of Mind: Flood insurance can provide peace of mind, knowing you're protected against a potentially devastating event.
In summary, while it's not mandatory outside high-risk zones, getting flood insurance can be a wise precautionary measure depending on your circumstances. It’s advisable to consult with an insurance agent who can provide more specific information based on your location and property.
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Paying off your mortgage earlier can save you money on interest and give you financial freedom sooner. Here are some strategies to help you achieve this goal:
1. Make Extra Payments
Biweekly Payments: Instead of making one monthly payment, make half of your mortgage payment every two weeks. This results in 26 half-payments or 13 full payments each year, effectively making an extra payment annually.
Extra Monthly Payments: Add extra money to your monthly mortgage payment. Even a small amount can significantly reduce the loan term and interest paid.
Lump-Sum Payments: Apply any windfalls, such as tax refunds, bonuses, or inheritance, directly to your mortgage principal.
2. Refinance to a Shorter Term
Refinancing your mortgage to a shorter term, such as 15 years instead of 30, can save you on interest and help you pay off your mortgage faster. However, this typically means higher monthly payments, so ensure it fits within your budget.
3. Round Up Your Payments
Round up your mortgage payments to the nearest hundred dollars. For instance, if your monthly payment is $965, round it up to $1000. The extra amount will go towards the principal.
4. Apply Raises and Bonuses
Whenever you receive a raise or bonus, consider allocating a portion or all of it towards your mortgage. This can accelerate your payoff without affecting your current budget.
5. Reduce Other Debts
Pay off high-interest debts first (like credit cards). This will free up more money to put towards your mortgage.
6. Cut Unnecessary Expenses
Review your budget for areas where you can cut back. Redirect the savings towards your mortgage payments.
7. Use a Mortgage Calculator
Use online mortgage calculators to see the impact of extra payments. This can help you plan and stay motivated by showing how much time and money you can save.
8. Stay Consistent
Commit to making extra payments regularly. Consistency is key to reducing your mortgage term significantly.
Important Considerations:
Check Your Loan Terms: Ensure there are no prepayment penalties or restrictions on making extra payments.
Emergency Fund: Maintain an emergency fund before making significant extra payments to avoid financial strain.
Consult a Financial Advisor: It’s wise to discuss your plans with a financial advisor to ensure you’re making the best decisions for your financial situation.
By employing these strategies, you can pay off your mortgage earlier and achieve financial freedom sooner.
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Why is it that when you pull your credit scores it is usually not the same as when you have one pulled for a mortgage?
Credit Karma is a great source but the scores are usually not spot on the value is that when you make payments or make changes the scores will change and a great tool to monitor the scores. Also, when you look at Discover or what you have with your bank again not the same as when pulling for a mortgage. The great news is that you have an idea of where your scores are and can work with that moving forward.
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The podcast currently has 280 episodes available.