Fed's $800B Plan Lowers Mortgage Rates

The Federal Reserve will spend $800 billion to purchase mortgage-backed securities from Fannie Mae and Freddie Mac, as well as consumer loans. The Fed will purchase $100 billion in consumer loans next week, and $600 billion in mortgage-backed securities by year end. As a result, rates for a 30-year fixed mortgages fell to 5.5% from 6.38% Wednesday morning. (Source: Barron's, The Fed Tries to top TARP, November 26, 2008)

What It Means to You

The Fed was successful in spurring commercial bank lending with the Commercial Paper Facility several weeks ago, although activity has stabilized. Mortgage applications should start to rise, as well, since Fannie and Freddie will have unloaded some of their debt and will be free to make new loans. However, the questions remains as to how much demand is there for mortgages.

However, if you are facing an interest rate reset and higher monthly payments, now would be a good time to refinance to a fixed-rate loans. Even though LIBOR rates have come down from earlier summer highs, there is still a lot of volatility in financial markets, and it is better to be safe than sorry.

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