In an announcement that comes as no surprise, in large part because it has been repeatedly telegraphed by the the Fed itself, the Federal Reserve Board on voted on Tuesday to leave interest rates at their current near zero rates. The Fed further reiterated its commitment to doing so for the near future, pledging to keep rates low through at least the middle of 2013.

There are several interesting implications for investors and consumers in the Federal Reserve’s actions and statements today. First, as mortgage lending continues to languish and be a rather slow and dour corner of finance, homeowners should take solace in the fact that there is no rush. While there is no guarantee rates will stay exactly as low as they are, the Fed’s continued commitment to low interest rates means that neither new mortgage interest rates or adjustable mortgage rates are going up any time soon.

Second, the Fed announced that it would continue to implements the so-called “twist” in which the Federal Reserve is moving its short-term bond holdings to longer-term bond holdings in an effort to bring down long-term interest rates. Longer term rates are traditionally less influenced by the Fed, which sets only the short-term overnight lending rate that banks use. However, this new wrinkle may prevent longer-term rates from rising, even if they were prone to do so. Again, this is good news for homeowners, though bad news for those trying to get better rates from longer-term bonds like pension funds.

Interest Rates Rising Soon is Myth

Third, the vote to keep interest rates low was 9 to 1, but it’s not what you think. The 1 vote against was not to raise interest rates, but rather a vote against current Fed action being insufficient. In other words, not only has the Fed committed to continuing ultra-low short-term interest rates, it is doing so unanimously with one member wanting low rates and then some. This is important because it shows that there is absolutely no reason to expect interest rates to rise anytime soon.

Fourth, while the Fed is very concerned about the U.S. economy and its lackluster growth, it did note that the economy IS actually growing. This is good news on several levels. It means that things are moving in the right direction, assuming that neither Europe, nor Washington, screws it up. It also means that the Fed is not going to kill off a weak economy by trying to thump it’s “inflation hawk” credentials.

Finally, although the Fed is leaving rates low and pledging to do so for an extended period of time, there is has been absolutely no talk of another round of Federal Reserve led stimulus for the U.S. economy. A third round of quantitative easing, or QE3, is not in the cards for the near future. I guess we don’t have to worry about Rick Perry indicting Federal Reserve Chairmen Ben Bernanke for treason before the U.S. elections.

What Fed News Means for You

What today’s news means for you is that if you are currently doing well enough, there is no reason to think that things will change. If you have been hunkering down, so to speak, fearing the worst, it is probably time to lower your guard a bit.

If you have been narrowly skating by in this long and lingering recession, then things are starting to look up. It looks like the economy is growing, albeit slowly, and that means things like lending, financing, and other money based systems should be getting better over the next year.

The two dark spots in all of this are housing and the job market. The amount of economic growth being seen is not enough to begin generating anywhere near the number of jobs needed to make up for millions of out of work Americans who lost their jobs. However, it does look less likely that solid companies will be dragged far enough down that they must lighten payrolls again.

Housing is still the big concern. Economic growth or no, foreclosure rates are still very high and lots of people are underwater on their mortgages. If you are just a bit underwater and want to stay in your home, riding this out is the way to go. If you are way underwater, it is probably time to look at all your options, including drastic measures. You want to be ready to recover when the economy does. Getting hit now makes you one of millions. Taking a hit a year or two after the economy starts to rebound puts you behind.

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Fed Keeping Interest Rates Low originally published at Personal Finance Blog - FinanceGourmet.com

The U.S. economy continues to grow at a very slow pace according to the Federal Reserve’s Beige Book. That isn’t good enough considering how deep the current recession is. At this rate, growth back to anything resembling an expansion would take a very long time. However, the good news is that the economy isn’t getting any worse for the time being.

The Beige Book is a summary of the current state of the U.S economy across all of the Fed’s districts and for the most part, all reports are of "modest" or even "slight" growth.

Inflation Not Happening

It seems that the highest "street cred" a Fed banker can have is to be an inflation hawk. Since 2008, however, inflation hawks have actually been Chicken Little’s. With the economy growing very slowly and many Americans still out of work, it’s hard to see where inflationary pressure could come from.

The just released Consumer Price Index (CPI) just confirmed that there is no real inflation anywhere to be found in the economy. The index rose just 0.1 percent. Prices excluding food and energy, both traditionally volatile pricing sectors that seem to move of their own accord rather than in step with other prices, actually rose at the slowest rate in six-months, suggesting that retailers have little to no upward pricing power in the months leading up to the holiday season.

In other words, the economy has to get moving again before anyone is going to have luck raising prices and that isn’t going to happen before Christmas. Look for a value priced holiday shopping season, but big discounts might be hard to come by as retailers won’t be reducing prices from higher profitability, growing prices, but rather from low profitability, stable prices.

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Economy Growing Slowly – Inflation Benign originally published at Personal Finance Blog - FinanceGourmet.com

Recently, newly official Presidential candidate Rick Perry suggested that it would be "treasonous" for Ben Bernanke and the Federal Reserve to "print more money" in order to play politics. If you want the political dogfight over the comments, check your regular media outlet. However, the comments highlight a fundamental misunderstanding that most Americans have about the Federal Reserve Board and its power over the U.S. economy.

Before we get into that, however, it seems that there is a glaring lack of logic in both Mr. Perry’s comments and the media reaction to them. If the Fed can fix the economy to such an extent that the recovery might alter the outcome of the election, whenever it chooses to do so, wouldn’t it be more treasonous to not be doing it right now, or say, six months ago?

In other words, if just turning on the printing presses would make a meaningful improvement to the economy, shouldn’t (wouldn’t) they be doing it right now instead of letting the U.S. economy stall, its citizens suffer and allowing other countries to gain strength at America’s expense?

The Fed’s Real Power

The truth is that "printing money" or other fiscal stimulus can only accomplish so much. The Fed’s target interest rate has essentially been zero percent for a long time now, and the economy is not racing ahead while President Obama builds double-digit leads in the polls.  In other words, the Fed has already tried printing money and while it may have lessened the economy’s slide into a second recession (so far) it has not kicked the economic afterburners in.

Theoretically, the Fed could take the gloves off and pull some massive levers that would provide a short-term, temporary improvement to the economy, but doing so would inevitably cause painful repercussions in the near future. Any trained economist knows this, and that is why Fed actions, are always muted. Things occasionally seem drastic, but only when compared to previous Fed actions.

These small actions are designed to help the economy, or control inflation, by nudging things in one direction or the other. It is a tricky game to play. If the moves are wrong, things can spiral out of control quickly and the actions necessary to bring things back in line become even trickier.

During Greenspan’s Fed years, he repeatedly tried to nudge some wind out of the sails of a stock market that he said was plagued with "irrational exuberance." It didn’t work. Wall Street bankers and Main Street investors continued to pour money into an inflating bubble thanks to cheerleaders like Goldman’s Abbey Joseph Cohen who shot to fame by always being "right" about the direction of the bubble market, at least until it stopped going up, since that is the only prediction she ever made.

When the Fed finally raised interest rates in a significant manner, its goal was to rein in inflation. However, the outcome was a nasty recession and a stock market crash. There is no doubt that neither was intended by the Federal Reserve Board.

At the end of the day, any reasonable use of Fed power, politically motivated or not, is but one of many factors pushing the U.S. economy around.

The Fed and Politics

Historically, the Fed has played politics consistently in one way. The Fed tries to never raise rates going into the Christmas holiday season. Smashing consumer spending before the biggest quarter of the year for any retailer or triggering layoffs during the holidays are the last thing anyone wants.

Understand this, Bernanke has already tried most of the tricks he has. If things start heading from blah to AGGHHHH, chances are he’ll try something again, and when he does, that will be a good thing, no matter who gets to take the credit (or blame) as President in a couple of years.

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Can The Fed Really Be Treasonous? originally published at Personal Finance Blog - FinanceGourmet.com

Today marks the first time the Federal Reserve will hold a press conference to go along with it’s decision on whether to change interest rates. Most observers expect the Fed to leave interest rates unchanged (basically at zero percent), so the real action will be in the details that emerge from the press conference where questions about how the economy is doing, what the Fed is doing, and how long they think those things will last, will take center stage.

In another change, the Federal Open Market Committee will also release the quarterly growth and inflation estimates that is uses to make its rate decisions today. Usually, the Fed releases those numbers weeks later.

Today’s changes could make for a very volatile day in the markets because no one has ever done things this way before, so no one really knows how they are supposed to react.

• Will the markets over-react to something Fed Chairman Ben Bernanke says?
• Will the markets react less than they would otherwise given how fresh all the data is?
• Or is this all just a bunch of sound and fury signifying nothing?

We’ll all find out later today.

No related posts.

First Ever Fed Press Conference originally published at Personal Finance Blog - FinanceGourmet.com

Credit cards that offer rewards, points and miles for every dollar you spend shopping are a great way to maximize your rate of return on your every day spending expenditures. However, in order to make credit card rewards pay off it is very important to get the right rewards credit card.

Finding out which reward credit card program is best takes a little bit of research. One of the most important factors in choosing the right rewards card is picking one that you will actually use both for spending and for redeeming points and miles for rewards. There is no sense in getting a Capital One Rewards credit card for free travel if you never really fly anywhere.

A top credit card rewards offer for people who don’t travel a lot is the Amazon.com Rewards Card which offers cardholders points for every dollar spent on a wide variety of purchases. Instead of redeeming points for free plane tickets, Amazon credit card users get free gift certificates to Amazon.com

Amazon.com Rewards Visa Card from Chase

The Amazon credit card rewards program comes with a lot of advantages for card holders with good credit scores. New customers looking for a credit card for people with bad credit or credit cards for people with recent bankruptcy might have to look elsewhere though.

New Amazon rewards card holders get $30 cash back with their first purchase on the Amazon Visa card.

Amazon rewards members earn points for every dollar spent on the card.

The big earnings come from shopping at Amazon.com which is not surprising. Cardholders earn 3 points for every dollar spent on amazon.com. In addition, credit card holders earn double points, or 2 points for every dollar spent at gas stations, restaurants and drug stores. All other places like grocery stores, bookstores, and clothing stores earn 1 point for every dollar spent.

Is Amazon Reward Card Worth It?

The best credit card reviews include not just the credit cards interest rate and whether or not the card has an annual fee, but also the value of the rewards offers and what is included in the credit card rewards catalog.

The Amazon.com Visa card is a great credit card to review because it is so easy to examine the card’s overall value.

The top value of Amazon Rewards Visa comes when you use the card a lot on Amazon.com.

The main item in the Amazon rewards catalog is a $25 Amazon.com gift certificate for 2,500 points. Other rewards in the rewards point chart are $50 cash back for 5,000 points. That makes the Amazon Visa a top value in credit cards issued by U.S. Banks.

If you spent all of our money on the Amazon credit card, earning 2,500 points would take spending just $833.33. That makes a best cash back value reward of $25 cash back for every $833 of purchases. The cash back percentage on the Amazon.com Visa card at this level equals 3% cash back on purchases made at Amazon.com. That is one of the highest cash back offers of any credit card. It is higher than cash back from Fidelity credit card and higher than the cash back rewards in the Citibank rewards catalog.

Of course, the cash back value declines with each dollar spent somewhere other than Amazon, but for heavy shoppers at Amazon this card is a great value.

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Amazon Rewards Visa Credit Cards originally published at Personal Finance Blog - FinanceGourmet.com

Everyone is worried about if and when the Federal Reserve will raise interest rates, even though the Fed itself continues to say that it is not considering doing so. The personal finance strategy Catch-22 here is that as soon as the Fed drops the language in its statement saying that they plan to leave interest rates unchanged for the near future, markets will react as if the Fed actually raised rates. That is what happens when interest rates are so low (basically just above zero) that everyone knows the only way they can go is up.

Recent inflation data about the Consumer Price Index, or CPI was released suggesting that inflation remains calm if not non-existent.

Consumer prices in the U.S. fell 0.1% on a seasonally adjusted basis in April as energy, housing, auto and apparel prices declined. The core CPI — which excludes food and energy prices — was unchanged in April, lowering the year-over-year increase in core inflation to 0.9%, the lowest rate since January 1966. – MarketWatch

What is Core Inflation or Core CPI

I find it ironic that with every news story published about the CPI there comes an in text explanation of what the "Core CPI" is. The single liner typically says, as above, that the Core CPI excludes food and energy prices. The irony is that the same news story makes no effort to explain what the Consumer Price Index is in the first place, so how much sense does it make to explain what is excluded from it to derive the Core CPI?

In other words, do you what price categories are included in the CPI? How much help is it then to know that the Core CPI does not include two of the categories from the original list that you don’t have? I’m just saying.

The Bureau of Labor Statistics calculates and releases numerous price indexes. The one that the media constantly refer to as The consumer price index or CPI is actually the All Items Consumer Price Index for All Urban Consumers for the U.S. Cities Average, 1982-84=100. This is abbreviated CPI-U. As you can see, there is actually a lot that goes into the number reported as CPI.

Components of Consumer Price Index CPI

The basket of goods measured by the BLS to compute CPI is actually very large. The main categories, as reported by the BLS, are:

• FOOD AND BEVERAGES
• HOUSING
• APPAREL
• TRANSPORTATION
• MEDICAL CARE
• RECREATION
• EDUCATION AND COMMUNICATION
• OTHER GOODS AND SERVICES

As you can see, the CPI measures a lot more than just your average everyday expenses. Some categories, such as Medical Care and Education affect certain people a lot more than others.

Check out the latest on Thank You Network Citibank

The Core CPI that the media likes to report about is officially known as All items less food and energy. You can tell from its title what the BLS thinks about this particular statistic. Nonetheless, the idea is that Food and Energy prices are particularly volatile and by excluding them one gets a better idea of what the "real" inflation is. Whether that is true or not depends in large part to what extent the increase in food or energy prices are part of a long-term trend versus short-term adjustments, much like day-to-day stock market prices.

Raw CPI data is virtually worthless, which is why the Fed takes into account many more factors to put the CPI index into context when making its rate setting decisions. In other words, it is best not to get caught up in the hoopla surrounding individual CPI numbers. However, keeping an eye over time on the statistic provides a thumbnail sketch of whether prices are rising or falling.

For now, the concern is not the CPI and the CPI will not be an important factor in the Federal Reserve’s interest rate policy in the near future. Right now, the Fed’s only concern is how to withdraw the extra stimulus it has provided to the economy through its unprecedented steps in 2008 and 2009 without causing the fragile recovery to collapse. Everything else is just background noise.

Related posts:

1. Inflation Jumps
2. Economy Growing Slowly – Inflation Benign

Inflation Stays Tame – Fed Not Raising Rates Soon originally published at Personal Finance Blog - FinanceGourmet.com

With Congress passing legislation to reign in some of the worst credit card abuses, credit card companies have been scrambling to get their terms and conditions, also known as the card contract, changed to terms more favorable to them before the new rules take affect. By changing your credit card agreement before the new credit card law takes affect, these card issuers can avoid having to play fairly as dictated by the new rules. However, this can mean bad things for customers and credit card account holders. Apparently, the banks aren’t concerned about losing business, because they are modifying terms on credit accounts left and right regardless of the person’s credit score or credit history. What can the average credit card customer do to fight back? Unfortunately, not too much, but there are some things that you can do to keep the credit card companies from cheating you out of your hard earned money.

Credit Card Interest Rate Increases

Under the old law, whenever a bank wanted to increase the interest rate it charged customers, it just sent out a letter saying that they were changing raising the interest rate. Consumers had no rights to do anything about it. The only option was to pay off the full balance immediately to avoid the higher interest rate, or transfer the balance to another credit card. In fact, when credit card companies needed to improve their balance sheets they would routinely do just this. If customers paid off their balances, then the company’s outstanding credit balance decreased. If customers didn’t pay off their balances, then their interest income from those balances increased. It was a no lose situation.

The new credit card law requires banks to give customers another option. Under this option, you can notify the credit card company that you reject the new interest rate which prevents your interest rate from increasing. In exchange, the account can no longer be used for new charges, but you may continue paying off your credit card balance under the old terms of the agreement. That means that you can still make the monthly payment, whether the minimum payment or otherwise, at the normal, sane, interest rate that you agreed to when you opened and used the credit card account. Obviously, this is not advantageous to the bank, so they are raising interest rates now, as fast as they can so that they won’t have to live by the provision once the law changes.

To fight back against credit card interest rate increases, the only thing you can do is pay off or transfer your balance before the new rate takes affect. If this isn’t practical, then continue making payments and pay off the card as quickly as possible. If you don’t carry a balance, the new rate won’t affect you until you do. The best vengeance is to never carry a balance on that card, ever. Credit card companies don’t make as much money off of customers that don’t pay interest, so keep using the card and pay it off in full every month. You’ll be fighting back against the credit card issuer and costing them profits. To really make them pay, be sure to take full advantage of their credit card rewards program to cost them even more money and make the card companies pay you!

If the way the company is treating you makes you so mad you want to close the account, don’t! At least not right away. Closing the account means you lose all of your reward points or miles. Instead, make sure you redeem every single credit card miles point you have earned before closing the account. Also, be sure you understand the effect closing an account can have on your credit score.

Finally, the most important thing is to REMEMBER. Banks are counting on their customers being mindless consumer sheep who don’t take the time to properly manage personal finances. They figure if they screw you over now, you will have forgotten all about it in six months. Don’t let them win! Remember exactly who did what and either close their accounts, or use them in a manner that makes them unprofitable for the company. If enough customers fight back, maybe next time, the banks won’t be so eager to try and cheat their customers.

Related posts:

1. Credit Card Company Tricks and How To Beat Them
2. Credit Card Rewards Programs – Are New Laws Making Them More Stingy?

How To Fight Credit Card Company Interest Rate Increases originally published at Personal Finance Blog - FinanceGourmet.com

New credit card laws passed by Congress in 2009 are going into effect.  What you need to know about credit card laws and how they have changed won’t be a big difference from what things were before.  Credit Card companies testified in front of Congress that they would stop using their very worst tricks.  That, plus a multi-million dollar lobbying campaign made sure that the new credit card laws did not require sweeping changes to the credit companies typically sneaky and underhanded business practices.

How do these new credit card laws affect smart credit card users who take advantage of good credit card rewards programs to earn points or miles?

One of the major rule changes states that when the credit card issuer decides to unilaterally change the terms of your contract, they have to give you 45-days advance notice.  If the new terms are not acceptable to you, you can opt out.

There is a catch.  In order to opt out, you must cancel your card, and close your account.  Then, you have to pay off the whole remaining balance within a certain number of days.  Oh, yeah, and that doesn’t apply to variable rate cards.

If you pay off your credit cards every month, then this is no big deal, because you could always pay off your card account and cancel it before you were charged any interest anyway.

If you carry a big balance on your credit card, then this doesn’t really help you anyway, unless you can figure out how to pay off that credit card account in 90 days.  If you could do that, you probably wouldn’t have the large balance in the first place.

Basically, the only people this really helps are people who have small to medium sized balances on their credit cards, and people who can take advantage of balance transfers to other credit accounts.  Of course, in that case, it was always possible to do that and then cancel the card anyway.

In other words, you have to be just as sharp and aware of credit card companies tricks.

Credit Card Rules Change Used to Hide Bad Company Behavior

As we’ve come to expect from banks and credit card companies, many credit card issuers are taking advantage of all the noise around the new credit card rules to make a few not-so-favorable changes to their credit card terms as well.

American Express recently notified some customers that their rates were going up.  The new rates are a variable rate equal to PRIME plus a certain percentage.  Some card holders report getting new terms of PRIME RATE plus 12% or so.  With the Fed holding rates at all time lows (nearly zero percent) that means that the interest rate on these American Express cards will be around 15%.

That doesn’t sound too bad.  Except for two things, first, now that these customers have variable rate cards instead of fixed rate cards, the helpful rules no longer apply because different rules apply to variable rate accounts than credit card accounts with fixed rates.

Second, watch out as the economy recovers and the Fed starts to raise interest rates back to more normal levels.  PRIME interest rates of 4% are just a 1% raise in the Federal Reserve target interest rate away.  Putting the Fed Funds rate back at a still very low 3% means a PRIME rate around 6% and the American Express card interest rate rises to 18% pretty quickly.

Be careful out there.  Remember always take advantage of reward credit card programs.  Use these various credit card rewards points to offset the expenses and inconveniences of always having to watch your back to make sure the credit card companies are sticking a knife in it.

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New Credit Card Laws Change the Rules in 2009 originally published at Personal Finance Blog - FinanceGourmet.com

This is part 2 of the series, the first part is: Not Time to Refinance Your Home

Future Interest Rates With Adjustable Rate Mortgages or ARM

Right about now, when you are starting to feel better, someone will throw in your face the fact that even if your rate is good, IT COULD GO UP AT ANYTIME.  That, is the second thing that is different. 

Mortgage companies and customers found that changing the interest rate every month was a hassle for everyone and only created more opportunity for errors and losses both for lenders and borrowers.  Almost every ARM adjusts on set periods.  The most common is a mortgage loan that adjusts once per year.

In other words, if our ARM started adjusting today, we would lock in a low rock-bottom 3.25% interest rate for a full year. 

What if interest rates do rise?

They will, you can count on that.  When, and how fast, is another question.  However, consider that everyone still considers the economic recovery that we seem to be having (or may not be having, no one is really sure) is very fragile.  The last thing the Fed wants to do is raise interest rates too far, too fast, and kill off the economy again.  You can expect them to be erring on the side of NOT raising rates for once.

When they do start raising rates it will be done slowly.  The first rate increase will almost certainly be 0.25%.  When that happens, mortgage rates will rise too.  If you like, you can go refinance that day.  It should be much easier to get a mortgage since that interest rate increase will come because the economy, and the banks, are doing better, so there will be less fear in lending.  Assuming the 30-year fixed rate jumps a full 0.75% on the news, compare that to what your current non-adjusted rate is.

On the 5-year note, we have, it is 5.125%, that is roughly what interest rates might be AFTER the Fed starts raising them.  So, there is really no downside even if rates do go up, and no one is expecting them to go up much soon.

Of course, you might not want to refinance even if the Fed does start raising rates.  Why?

Because most adjustable mortgages include clauses defining the maximum amount the interest rate can go up during any one adjustment period (in our case, one-year).  In our case, the rate can never change by more than 2% from the previous year.  That means that if we did get locked in at 3.25%, the highest our interest rate could possibly rise to next year would be 5.25%.  Again, compare that to what you could refinance to today with no fees and no closing costs.

In other words, we would be set from now until June 2011 without the possibility of our interest rate increasing any amount that would justify refinancing.  In fact, through June 2012, we are guaranteed to not pay anything higher than 7.25%.  That isn’t rock-bottom, but hardly sky-high either.

Refinancing will cost you a couple thousand dollars in fees most likely which means it could take years to break even once the rate you have locked in for 30 years is actually lower than would you could have by not refinancing.  Again, by way of example, if we could get something like a 5.0% 30-year fixed mortgage for just $2,000 worth of TOTAL costs including any administrative fees or charges, it would be June 2012 before we started saving any real money on our monthly payments.  It could be 2014 before we started coming out ahead.

So, while not refinancing guarantees us a low-cost mortgage through June 2011, and an average mortgage through June 2012, actually refinancing can’t even POTENTIALLY offer us any advantage until at least 2014!

Can you guarantee that your job, desired home location, family size, and lifestyle will stay the same through 2014?  Me, neither.  We won’t be refinancing.

(Just for full disclosure, the Note I’m referencing actually adjusts at the end of 2009 making this a slightly bigger gamble, but still a pretty safe bet.  No one expects rates to rise much between now an the end of 2009.)

No related posts.

ARM Interest Rates Adjusting Soon May Be Good News For Homeowners originally published at Personal Finance Blog - FinanceGourmet.com

The world of adjustable-rate mortgages isn’t very old when it comes to the general population.  Sure, the product has been around for a long time, but it wasn’t until late in the 1990s that it turned into the kind of thing your average neighbor would have.  That lack of age also means a lack of experience. 

So when media outlets start reporting about “Black Wednesday” when mortgage interest rates shot up, and then follow up it up with “news” asking if homeowners who didn’t refinance already have missed the boat and wondering if there will ever be lower interest rates again, the average person starts to worry.

Many homeowners are doing the wrong thing right now, or are up nights worrying about something they don’t need to worry about just yet, because now might just be the perfect time to NOT refinance your mortgage.

With the economic recession and collapse of the banking industry, as well as the drying up of the credit markets, the Federal Reserve Board (FED) has cut it target short-term interest rates to near zero—officially 0% to 0.25%.  Doom and gloom headlines about socializing banks, Chrysler and then GM bankruptcies and of course, plenty of stories about how bad the lending business is may have put the silver lining about your adjustable rate mortgage in your blind spot.

If you have an adjustable rate mortgage that will start adjusting it’s interest rate in the near future, you may have been waiting with dread for that date to arrive. This likely applies to you if you picked up a 5-year ARM toward the end of the real estate bubble, or a 7-year ARM or 10-year ARM earlier on.

The conventional wisdom has always been to refinance out of your ARM before the interest rate begins adjusting.  The idea is that you don’t want your mortgage interest rate behaving like a credit card interest rate and changing your mortgage payment every month.  But, two things have changed so much that the conventional wisdom might actually steer you down the wrong path.

ARMs Adjusting Interest Rate Lowest Ever

While the Fed has struggled to keep long-term interest rates on new mortgages as low as it would like, it does not have that problem in one area.  Most existing ARMs are tied to interest rate index.  Usually, the adjustable rate mortgage interest rate is equal to that index plus a specified amount.  The index your interest rate is tied to and the interest rate spread added to that rate are spelled out in your mortgage documents, or more specifically, in your “Note.”

  For example, a 5-year adjustable rate mortgage we have on a property is set based on the weekly yield on the United States Treasury securities adjusted to a constant maturity of one year.  That sounds like a nightmare, and it probably is if you actually have to calculate it buy you don’t since the Federal Reserve Board publishes that number daily.

The United States Treasury Securities Adjusted to Constant Maturity of One Year index is 0.50%.  Actually, it fluctuates daily and for the end of May was 0.49%.  It’s been lower the first few days of June, not higher.

In other words, on this particular mortgage, if our interest rate were to adjust today, our new adjustable interest rate would be 3.25%.  I dare you to find a mortgage you can refinance into with that interest rates with no closing costs or loan fees of any kind, because when it comes to a mortgage you already have, you pay zero fees, with no fine print!

What if mortgage rates go up after you decide not to refinance

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Time To NOT Refinance Your Mortgage originally published at Personal Finance Blog - FinanceGourmet.com