Fed Cuts Rate to a Range of Zero to 0.25 Percent
Fed reduces benchmark rate to as low as zero
Tuesday December 16, 6:41 pm ET
In strong step to fight worsening economy, Fed cuts key interest rate to zero for first time
The Fed’s action was unprecedented in the central bank’s 95-year history, and Wall Street embraced it. The Dow Jones industrials, which had been up about 120 points ahead of the Fed announcement, finished the day up nearly 360, a gain of more than 4 percent.
For the first time, the Fed created a target range for its funds rate, putting it at zero to 0.25 percent. That was a dramatic reduction from the previous rate, which was an already low 1 percent. The federal funds rate is the interest that banks charge each other for overnight loans.
The radical action underscores the breathtaking deterioration in the U.S. economy and the stability of the financial system this fall, and even since Fed policymakers last gathered in late October.
For years, cutting the funds rate had been the Fed’s most potent weapon for snapping an economy out of trouble. But the recession, which economists say began a year ago, seems to be worsening despite all the steps taken so far.
The move “will go down in the annals of Fed history,” declared Stephen Stanley, chief economist at RBS Greenwich Capital. “I nominate this one to be called the `Who Could Ask for Anything More?’ statement. The Fed is throwing everything in its arsenal.”
There was fresh evidence of the economic danger Tuesday before the Fed announcement. Housing starts for November plunged by almost 19 percent, the most in a quarter-century.
And consumer prices fell by a record 1.7 percent in November, the second straight monthly decline, raising fears the nation is in a dangerous bout of deflation — a widespread, prolonged decline in prices that would take a bite out of personal income and corporate profits and do further damage to the already pummeled housing market. The Fed’s lower rates could help prevent deflation from taking hold.
At the heart of the economic crisis are credit and financial problems that have made worried banks reluctant to lend to customers — regardless of how cheap money has become.
At the same time, fearful Americans, watching jobs evaporate and their investments crumble, have sharply cut back on spending, including on big-ticket purchases such as homes and cars that typically require financing.
The Fed hopes lower borrowing costs will entice people and businesses to spend more, helping the economy. Citing “weak economic conditions,” the Fed said it expected to keep its funds rate at “exceptionally low levels … for some time.” Read more…
Reduced Maximum Loan-to-Value (LTV / CLTV)
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Cash Out for 1- to 2-unit owner-occupied properties
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Purchase and No Cash Out for 2- to 4-unit owner-occupied properties
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Purchase, No Cash Out and Cash Out for second homes
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Purchase, No Cash Out and Cash Out for 1- to 2-unit investment properties.
LTV
The Loan-to-Value (LTV) is calculated by dividing the loan amount into the Sales Price or Appraised Value, whichever is lower. For refinance loans, it is calculated by dividing the loan amount into the appraised value.
CLTV
The Combined Loan-to-Value (CLTV) is calculated by dividing the total of the Loan Amount and any additional subordinate financing into the Sales Price or Appraised Value, whichever is lower, or simply into the appraisal value for refinance loans
Many Banks have the following Maximum LTV’s / CLTV’s and Loan Limits*:
Standard Conforming – Full Documentation – Fully Amortized
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Super Conforming (Jumbo) – Full Documentation – Fully Amortized
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*Some Banks that don’t use Freddie Mac and Fannie Mae platform permit cash out refinance up to 90% LTV for 1 unit primary residence with minimum 650 credit score without PMI and interest rate adjustment (up to 750K loan amount). HELOC (home equity line) – up to 350K, maximum 80% LTV
Initial Documentation Required for a Mortgage
When you apply for a mortgage, you should have the initial documentation readily available to your broker to analyze your situation, do math, understand your aims. A broker will run your scenario with different banks trying to find lenders that are willing to accept your application, especially on today’s market, choose the best lenders for you, and develop comprehensive mortgage plan that fits into your financial goals. Only then, he will discuss with you available mortgage options and provide the actual rate quote.
You will need to provide the following documents:
1) Income Documentation - This represents your income and work experience. Banks want you to have 2 years experience preferably without gaps.
-Explanation letter of job history/gaps/unemployment
-For Employees:
-Past 2 years W-2 statements
-Most recent 30 day’s pay stubs
-For Self-Employed or Commissioned:
-Most recent 2 years signed federal tax returns
-Business Certificate/License
-YTD profit and loss
-For Divorced People:
-Complete Divorce Decree or Separation Agreement with stipulations regarding payment of child support, alimony and separate maintenance
-Verification of Alimony/Child support payments
-For Investment Property Owners:
-Lease agreements (all rental properties)
-Most recent 2 years signed federal tax returns
2) Assets Documentation - Available liquid assets for down payment, closing costs, and reserves need to be verified. Any large deposits on the accounts may also need to be explained. You can present copies of paper statements mailed to you, or online printouts as long as your name and bank are clearly legible on the printout.
-Most recent 2 months statements for checking and savings accounts
-Latest statements for investment accounts (401K, IRA, Stocks, Bonds, etc.) – Will be used 70% of investment value
3) Liabilities Documentation - You will sign Borrower Signature Authorization form that allows a broker to run your credit history. He will calculate your total liabilities and Debt-to-Income (DTI) ratio, check your middle credit score and derogatory trades. Different lenders have different guidelines for DTI.
There might be other documents required for final approval, but the above is a good start.
Why Refinance Today?
The most common reason for refinancing today is to save money. Saving money through refinancing can be achieved in several ways:
-By obtaining a lower interest rate to reduce mortgage monthly payment. Mortgage interest rates are low today, especially on fixed rate programs. Check the current rates. It means you have a chance to improve your financial situation during crisis. For example, $400K loan amount 30-year term at 6.5% – monthly payment is $2,525.27; and at 5.5% – monthly payment is $2,271.16. To reduce your rate by 1%, you can save $257.11per month. If you are planning to move or even pay off your loan within the next few years, refinancing probably makes little sense because you won’t be paying monthly bills long enough for the savings to cover the up-front closing costs. “Generally, if you can earn the costs back within two to three years, and it’s a home you’re prepared to stay in for much longer than that, it’s usually a good thing,” wrote by Greg McBride, economist at Bankrate.com. A payback period (mo.) = closing costs divided by monthly savings.
-By reducing the term of the loan to save money over the life of the loan. For example, refinancing from a 30-year loan to a 15-year loan might result in higher monthly payments, but the total interest paid during the life of the loan can be reduced significantly.
-By increasing the term of the loan from 15-year to 30-year term, if you need additional money in your pocket to pay bills. For example, $400K loan amount 15-year term at 5.5% – $3,268.33 monthly payment; 30-year term at 5.5 - $2,271.16 monthly payment. You can have additional $997.17 per month in your pocket.
-People also refinance to convert their adjustable loan to a fixed loan. The main reason here is to obtain the stability and the security of a fixed loan at a lower interest rate. “If you plan to stay in your home for years, and you are currently in an adjustable-rate mortgage, you should strongly consider a refi. ARMs are incredibly dangerous — the financial equivalent of Russian roulette, but with multiple bullets. Refinancing into a 30-year fixed-rate loan may not cut your current monthly payments by much, but it gets rid of the risk that those payments will suddenly skyrocket.” – wrote by The Wall Street Journal.
-Another reason why homeowners refinance is to consolidate debts (cash-out refinance) and replace high-interest loans with a low-rate mortgage. The loans being consolidated may include credit cards, student loans, auto loans, second mortgages, etc. In many cases, debt consolidation results in tax savings, since consumers loans are not tax deductible, while a mortgage loan is tax deductible. We still have banks that allow cash-out RIFI for high Loan-to-Value (LTV) mortgages up to 90% without PMI and cash-out adjustment to par rate.
Read Closing Costs vs. No Closing Costs and What Fees are Included in Closing Costs? Can You Avoid Them?
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