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Many people may be wondering how it is that mortgage rates have dropped to such low levels and have actually remained here for almost 4 months now. I’ll try to give you an explanation…in plan English. Here we go…
There are a number of factors at play here, but the primary driving force is the actions of the Federal Reserve beginning in January. As part of the stimulus package, the Fed became an active buyer of Mortgage Backed Securities (MBS). MBS’s are traded in the bond market, just as stocks are traded in the stock market.
Mortgage interest rates rise and fall based on the performance of these securities. When their values rise, mortgage rates fall and when their values decline, rates go up. Isn’t that interesting?
Now that we understand what makes mortgage rise or fall, let’s get back to the role that the Federal Reserve is playing. As I mentioned, back in January, in an effort to push mortgage rates down, they where given a $500 billion budget to purchase MBS through June of this year. That’s a lot of buying power and a lot of demand. As we all know from economics 101, when you have increase demand you have decreased supply and when you have decreased supply the price of that supply goes up.
This purchasing program by the Fed has been hugely successful, as evidence by the historically low rates we are all currently enjoying. In fact, it has been so successful that a few weeks ago the Fed announced that its budget for this program was increased by $750 billion and will continue through 2009. This is a tremendous opportunity for us to take advantage of. Forget about waiting on tax cuts! Refinancing to a rate below 5% can produce a huge cash flow savings for most people.
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