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Mortgage Rates Drop on News of Proposed $800 Billion Plan

[Nov 28, 2008.]


Those looking to refinance their mortgage, and can qualify for a new loan, received good news this past Tuesday.

According to the Wall Street Journal, "Rates on 30-year fixed-rate mortgages dropped by roughly half a percentage point to about 5.5%, for borrowers with good credit scores and substantial equity in their homes."The improvement in mortgage rates resulted from an announcement from the U.S. Government that they plan to stimulate the economy by purchasing $600 Billion worth of mortgage-backed assets and $200 billion in consumer-debt securities.

Mortgage rates are determined by the pricing of mortgage backed securities. As demand for mortgage backed securities goes up, mortgage rates go down. This new government plan will create an immediate increase in demand which will help lower rates.

Homeowners with good credit and plenty of home equity certainly responded to the quick drop in rates and began to refinance.

According to the same Wall Street Journal article, "At Bank of America Corp., call volume was roughly twice what was expected at call centers and via the Internet, said Matt Vernon, national sales executive. "It's the folks who have been sitting on the sideline. They're jumping in with this news."

Lower rates are also expected to stimulate housing demand and help stabilize prices.

What this new plan does not address, however, is the majority of homeowners that are either unable to qualify for a new mortgage due to tighter underwriting guidelines or those who simply owe more than their home is worth.

There are also those who believe that the impact on the real estate market will be minimal since many consumers are hesitant to purchase a new home as long as they remain uncertain about their job stability and financial future.

For those who are still able to obtain financing, now is a great time to refinance. For those who do not qualify or concerned about their future, lower rates may not make much of a difference.


About Author:

Chris Rocks is the Regional Director of the National Credit Federation (NCF), a consumer advocacy group that assists small business owners and consumers overcome debt and credit challenges.

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