Maine – More From Business Booster Collection

 My “in-house” mortgage consultant sends me these articles several times a month. Of course, I couldn’t even begin to explain this, even after reading as it is not my area of expertise. Everday, there is news about the real estate market and the mortgage industry keeping consumers on the edge of their seats. It is prudent that we remain well informed. 

An Inverted Yield Curve:
What It Means to Mortgage Rates & Programs  

The U.S. economy, interest rates, and the housing market are frequent topics on the nightly news. Viewers are told about leading economic indicators, how the stock market has performed, and whether the Federal Reserve is planning on changing interest rates. What isn’t explained is how these items are interrelated and how they may impact which home loan is best for you.

The Federal Reserve attempts to keep the U.S. economy healthy through its use of monetary policy. As fears of inflation increase, the Fed will raise certain short-term interest rates such as the federal funds rate, which is the interest rate banks pay each other for overnight loans. Such an increase causes a ripple effect, with banks raising their prime lending rate. This, in turn, causes an increase in Adjustable Rate Mortgage (ARM) rates and the indices they’re tied to, such as the 12-Month Treasury Average (MTA), the 11th District Cost of Funds Index (COFI), and the 1-Month London Inter Bank Offering Rates (LIBOR).

Under normal circumstances, long-term interest rates would also increase even though they are determined by market trading of bonds and mortgage-backed securities rather than monetary policy. However, in certain instances, the market responds in an unexpected manner.

Long-term interest rates are driven by a desire to place money in a steady vehicle that will provide a decent rate of return. When the stock market is underperforming, many corporate and individual investors will sell stocks, and invest their money in bonds. Typically, the longer the holding period of a bond, the higher the yield it will offer. This makes sense because the longer an investor’s money is tied up in that investment, the more they should receive for it. However, when there is an increased demand for bonds, the law of supply and demand comes into play. As the demand for bonds increases, the need to attract investors decreases, so the yield offered on those bonds declines.

When the Federal Reserve pursues an aggressive policy and raises short-term interest rates repeatedly over an extended period, and the bond and mortgage-backed securities markets are booming so their yields are lower, an unusual situation arises. Short-term interest rates are high while long-term interest rates remain lower. This leads to a shift in the usual yield-versus-term paradigm, known as an inverted yield curve.

So what does this mean to a consumer who is trying to determine what type of mortgage would be best under these economic conditions? It means that the cost of an Adjustable Rate Mortgage is not significantly lower than that of a 15- or 30-year fixed mortgage. Rather than taking out (or keeping) an ARM, which is variable and will increase if short-term interest rates keep rising, it may be better to pursue a 15-year or 30-year fixed rate mortgage.

Because economic conditions are constantly changing, it’s important to consult with a mortgage professional who is knowledgeable about the markets and how they impact the different loan programs available. This will ensure that homeowners obtain the best mortgage available despite market fluctuations.

If you would like to discuss this topic further, please give me a call!
We can explore how to assist our clients in this unusual rate environment.

 

John Dugan
Mortgage Consultant
Approved Home Mortgage

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The Business Boosters Collection

I subscribe to this newsletter that provides great inspiration as well as tips. This insight fuels imagination and motivates me to keep plugging on. When you need the daily inspiration to keep your business and lifestyle moving, whether it be music orprint materials, seek the numerous resources available on-line or find a bookstore. You will be healthier, wealthier and wiser.

Read on for today’s Business Booster:

The Art of Happiness
Making Each Day Your Best

In The Art of Happiness*, the Dalai Lama shares this powerful insight into life:

“I believe that the very purpose of our life is to seek happiness. That is clear. [Regardless of religion], we are all seeking something better in life. So I think the very motion of our life is toward happiness.”

But how are we to achieve this happiness that we all seek? What common factor can we rely upon, regardless of our health, wealth, appearance, family, etc? The Dalai Lama goes on to discuss how the mind can be trained for happiness, despite a lack of material wealth and success. It’s that whole idea of “wanting what you have versus having what you want.”

Stephen Covey refers to this as “responsibility,” or the ability to choose your response. Tony Robbins calls it “re-framing your perspective”. James Allen simply calls it “self-control.” Whatever name it goes by, the principle is the same: We all have the power to think positive thoughts, and to react positively to every “negative” thing that happens in our lives.

Why, then, is it so hard to do?

Because like anything of any worth, it takes effort. It takes practice. It takes time. And like most skills, the sooner you begin, the sooner it gets easy. But no matter how old we are, we can all start practicing positive thinking today, and begin being happier immediately.

It’s very easy to get out of practice, however, so it’s best to surround yourself with triggers for happiness. Music is one of the best triggers. Just think how happy we get when we hear Little Orphan Annie singing, “The Sun Will Come Out Tomorrow,” or Bobby McFerrin crooning, “Don’t Worry, Be Happy.” We can also remind ourselves with little incantations such as “look on the bright side” when things aren’t going as planned.

I hope this tip brightens up your day!

Stay tuned for more Business Boosters coming your way!

*The Art of Happiness, by Howard C. Cutler, MD, ©1998, Simon & Schuster, Inc.

 

 


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