Mortgages

By Chris Kissell

As the nation’s economic problems grind on, the government has shifted its recovery efforts into overdrive, according to Bob Walters, chief economist for Quicken Loans.

“We’re obviously in incredible times,” he says, adding that the government has gone beyond measured action. “Now they’re throwing in the kitchen sink — and they’re pulling out the plumbing,” he says. “They’re really attacking this problem.”

Thus far, most of the emergency measures have focused on shoring up the banking system, Walters says.

However, he now sees the government turning toward the source of the problem — people falling behind on their mortgage payments. The Nov. 25 announcement that the Federal Reserve would buy up to $500 billion of securitized loans likely marked the opening salvo of a concerted effort to aid homeowners directly, Walters says.

“It’s the first thing that’s really assisting Main Street,” he says. “Everything else was assisting the banking system and Wall Street.”

Soon after the Fed announced its intentions, mortgage rates plummeted and are now near 45-year lows. “You saw mortgage rates drop by a full percentage point,” he says. “That was direct stimulus.”

Lower mortgage rates — coupled with falling gas prices — are helping consumers to better navigate choppy economic waters, Walters says. “Refinancing has exploded, and you’re going to see that’s going to put money into people’s pockets,” he says.

However, Walters says, the nation’s financial and economic problems remain “diverse” and “severe,” and he doesn’t expect a quick turnaround.

“I’ve come to realize that there won’t be any silver bullet,” he says. “There won’t be any one program that resolves it. There will be a lot of things, and there will be a lot of yelling and screaming because no matter what happens, somebody is going to be wronged.

“It’s going to be messy, and we’re going to have to continue to work out of it.”

Getting in the game

Meanwhile, potential homeowners spooked by a crumbling economy and sinking home prices remain on the sidelines, waiting for better days before shopping for homes.

But that approach may be misguided, says David Kuiper, a mortgage planner at First Place Bank in Holland, Mich.

“Home purchases should be made from a long-term perspective, not a short-term one,” Kuiper says. “I don’t recommend worrying about if prices might drop further. It only matters when you go to sell.”

Trying to score the best possible price by waiting for the housing market to bottom is an “exercise in futility,” Kuiper says. Instead, home shoppers should pay closer attention to mortgage rates, which have fallen to near 45-year lows.

“A slight increase in interest rates can wipe out the gains of a price drop in a heartbeat,” he says.

However, the best deal in the world makes no sense if your finances are unsound, says Dan Green, a Cincinnati-based Certified Mortgage Planner with Mobium Mortgage Group.

“There’s no sense buying a new home if you’re going to stay awake in your new bedroom at night, wondering if you’re going to make your payments,” says Green, who also writes TheMortgageReports.com.

Walters agrees that individual homeowners must assess their own financial circumstances before wading into the market. “If you think you are on thin ice as far as your job, and you are renting, maybe you continue to rent,” he says.

On the other hand, consumers whose finances are solid can find great deals right now, he says. “Housing affordability has gone up substantially,” Walters says. “So for those who do have a job and feel decent about it, I think it’s a pretty good time.”

Wait to refinance?

If you already own a home, now may be the perfect time to refinance. Mortgage rates have fallen sharply since the Federal Reserve announced it would buy up securitized home loans.

Some homeowners may be tempted to wait for rates to fall even further. In recent weeks, there have been rumors that the Treasury Department might buy up mass quantities of mortgage-backed securities as a means of driving down mortgage rates as low as 4.5 percent.

However, Kuiper warns against procrastinating. “It is wiser to make an informed decision than to postpone a decision based on speculation,” Kuiper says. “If rates decrease in the future, it is cheap and easy to refinance.”

Cameron Findlay, chief economist at LendingTree.com, also urges homeowners and home shoppers to act now. Rates have fallen so quickly — and by so much — that it’s “very unlikely you will see a decline of that magnitude again anytime soon,” he says.

“For borrowers, this is the eye of the storm,” he says. “Take safe haven in this low rate environment while you can.”

Tightening credit conditions also provide an extra reason for people to refinance now instead of later, Green says.

Homeowners whose monthly debt exceeds 45 percent of their income and people trying to refinance investment properties are “the next two groups to be eliminated,” Green says.

Take away

The Federal Reserve’s decision to cut the federal funds rate by at least 75 basis points is unlikely to have a major impact on mortgage rates, which are not directly linked to Fed actions.

However, mortgage rates have plunged in recent weeks, making this an excellent time to secure a new loan or refinance an existing mortgage.

Bankrate’s rate tables can help you compare mortgage ratesin your area.

Bankrate can also help you calculate whether a fixed-rate or adjustable-rate mortgage is better for you.

To determine whether refinancing is right for you, use Bankrate’s mortgage calculator.

Home equity

By Chris Kissell

Every time the Federal Reserve cuts rates, borrowing costs on home equity lines of credit fall. Normally, this would give homeowners with HELOCs reason to celebrate.

But these aren’t normal times.

In recent months, lenders have frozen access to millions of HELOCs. “Lenders are moving rapidly to cut those off,” says Bob Walters, chief economist at Quicken Loans.

That means millions of homeowners cannot take advantage of the improving HELOC rates. Lenders are abandoning home equity products for now because they view them as too risky in the current climate.

“They’ve seen horrific losses and they see home prices dropping,” Walters says. “They know people are upside down on their homes in many cases, or worry that they will become such.”

As the cycle of worry deepens, lenders become even more restrictive. The pattern illustrates a classic market verity, Walters says.

“Markets overextend in both directions,” he says. “In the good times, people go too far and become far too lax — and certainly we saw that.

“And in the bad times, people go too far and become far too restrictive. That’s just the way it is.”

What should borrowers do?

Walters says it’s difficult to predict when credit finally will thaw enough to allow home equity lending to start in earnest again. When asked for a time frame, he offers a sobering conclusion.

“Sadly, not anytime soon,” he says.

Cameron Findlay, chief economist at LendingTree.com, says home equity lending will lag until home prices begin to appreciate again. “We do not expect to see that improve until wages and unemployment improve, both of which are forecast only to get worse in 2009,” Findlay says.

In the meantime, some HELOC holders may be tempted to take pre-emptive action by withdrawing a large amount of credit from a HELOC before their lender has a chance to freeze the line of credit.

In this strategy, withdrawn funds are moved into a high-yield savings account or a CD. If the savings or CD rate is high enough, it can wipe out any borrowing costs associated with holding the HELOC funds.

However, Walters is wary of using such a strategy. “I’m not going to endorse it one way or another,” he says.

While he admits that pulling HELOC funds appears “pretty attractive” right now, it only makes sense “as long as you don’t believe there’s a (rate) spike at some point in the future.”

Any future Fed rate hikes would send HELOC borrowing costs — and monthly interest payments — soaring. “If your borrowing costs exceed reinvestment costs, then you’re paying a real cost to hold onto that liquidity,” he says.

Ultimately, borrowers need to weigh how much risk they are willing to take on before employing such a bold strategy. “Everyone has to answer that question for themselves,” he says.

Take away

The Federal Reserve’s decision to cut the federal funds rate to a range of between 0 percent and .25 percent will drive down borrowing costs on home equity lines of credit.

It’s more difficult to forecast the direction of home equity loan rates, which do not move in tandem with Fed rate decisions. Loan rates recently have soared to multi-year highs.

Meanwhile, lenders continue to turn away from home equity products as credit conditions tighten while the Fed does everything it can to reverse the process.

“Liquidity is key, and thus far the Fed has been using every tool available to them to improve the flow of cash to banks,” Findlay says. “The Fed cannot force banks to lend, but they can make it cheap enough (that) they want to.”

CDs & MMAs

By Laura Bruce

Focus on cash.

When the economic outlook is this ragged, it’s smart to have an adequate supply of cash. Getting a decent return on that cash is always important, but it can be critical if you’re retired.

Don’t panic looking for a safe haven and buy Treasuries that aren’t paying you anything. An FDIC-insured or NCUA-insured CD or money market account will protect your investment and accrued interest up to $250,000 per institution.

If you have additional money that you want to keep in a bank, consider titling your accounts to qualify for more coverage. For instance, a husband and wife can each have $250,000 in individual accounts. They can each have $250,000 in a joint account. They can each have $250,000 in a retirement account. And they can each set up a $250,000 revocable trust account, payable on death, naming each other as beneficiaries.

The insurance limit’s increase from $100,000 to $250,000 is temporary. Unless Congress extends it, the increased protection will end Dec. 31, 2009.

“The FDIC is a nice umbrella to carry people as long as the $250,000 lasts,” says John Sestina, a Certified Financial Planner in Columbus, Ohio. “I always recommend that people do short-term CDs so they’re protected when inflation comes back — and you know it will because of all these bailouts. You want to be able to take advantage when interest rates rise.”

Take advantage of high-yield CDs offered by banks that are chasing deposits and new customers. The average yield on a one-year CD is 2.3 percent, according to Bankrate surveys. In Bankrate’s high-yield database there are, as of this writing, 33 banks offering one-year CDs with yields above 3 percent and one, GMAC Bank, paying 4.2 percent. All are FDIC-insured. Even the six-month high-yield CDs are significantly above the average one-year yield.

If you’re skittish about locking up your money for any amount of time, consider a high-yield money market account, which is also FDIC-insured. There are 27 listed in Bankrate’s high-yield money market account database that are paying above 3 percent.

The ability to beat the averages and earn more money on your cash hasn’t disappeared just because the economy is struggling.

Tired of managing your own portfolio? Consider a Certified Financial Planner.

Autos

By Sheyna Steiner

If you’re among the few brave souls shopping for a car this winter, the process of obtaining financing has not actually changed — it still requires borrowers to do their homework, save up a down payment and know their credit score.

What has changed from about two years ago are lenders’ underwriting standards.

“There is credit available, but absolutely the underwriting standards have tightened up quite a bit — the creditworthiness of applicants becomes an issue, continued employment becomes an issue — so the underwriting has definitely gotten a little bit tighter for auto loans,” says Mike Celuch, chief financial officer at Paragon Federal Credit Union.

Understandably, financial institutions don’t want to make loans to people who may find themselves unemployed a few months from now. And the reverse is true: Most people aren’t eager to take on a lot of debt right now.

“There is a real lack of consumer confidence. If somebody is worried about keeping their job, they are not going to go buy a car no matter how low you cut the rates, says Greg McBride, senior financial analyst at Bankrate.com

“You’re seeing the tighter loan standards on a couple of fronts,” he says.

“Some of the manufacturers’ finance companies have raised the minimum credit score requirement. The other aspect is that the down payment requirement has gone up, so you could have sterling credit but if you don’t have a down payment, you’re going to have a tough time getting an auto loan. All of that serves to impact potential car buyers and the outlook for car sales in the near term,” McBride says.

Serious borrowers should have at least 20 percent to put down on a car. Without that amount, shoppers can choose to save more or possibly scale back on the amount they would like to borrow.

Further, knowing ahead of time what you’re worth to a lender will help you get the best deal possible. Pull your credit report a few months before you go shopping so you’ll have time to fix any mistakes.

Then shop around to find out how much of a loan banks and credit unions are willing to extend. Start by comparing local and national rates on Bankrate.

“People that are serious about buying a car today, they really should go out and check financing prior to going to the dealership,” says Celuch.

“If you have a credit union or bank that you’re dealing with, find out if you’re eligible for a loan, because that really will make the buying decision easier at the dealership — you will have an indication if you qualify and how much you qualify for,” he says.

Take away

Don’t bite off more than you can chew when financing a car. Even though the payments may be easy to make now, its an ongoing obligation that will stick with you for years. Check out this Bankrate calculator to determine whether a new or used car will be best for you.

Credit cards

Leslie McFadden

The Federal Open Market Committee, or FOMC, cut the federal funds rate to a historical low of a range of between 0 percent and 0.25 percent. So what does this mean for you and your credit cards? Not much, unless if you have excellent credit.

Many variable-rate cardholders won’t see their rate drop. Those with excellent credit are more likely to see a minimum 75-basis-point dip. But in this environment, any slight decrease could be short-lived if your risk increases.

“If you do anything — and I mean, anything — to give the issuer any indication that you’re a higher credit risk, chances are your APR will go up and/or your credit limit will go down,” says Bill Hardekopf, CEO of LowCards.com.

Changes to your payment and spending patterns can signal financial trouble. Triggers can include letting balances grow, revolving balances instead of paying them off as usual and starting to take out cash advances.

If the card company lowers your limit or bumps up your rate, take action. Make a call to customer service. Use competitive card offers that you’ve either received or found online at Bankrate.com and say you’ve got offers for lower rates. Hardekopf suggests saying, “I would like to stay with you, but I’m going to be moving to one of these competitive offers unless you can give me give me an APR down to Y amount, whatever that might be.”

He says to try again a month later if you’re turned down. Make several attempts.

Meanwhile, he says, work on improving your score. If your issuer won’t work with you, you’ll need a higher score to get approved for a card with better rates.

Use cards that are tucked away in a sock drawer once every six months if you want to keep the accounts open. Charge something cheap, such as a latte, and pay it off the same month. If the card gets canceled for inactivity before you can use it, ask to have the card reinstated.

If you need to transfer a balance to a new card, compare the terms and conditions of each offer. Watch out for the balance transfer fee — the charge for moving the amount over — which averages 3 percent of the balance and may not have a cap. Hardekopf says the introductory period for the balance-transfer rate can be as short as three, six or nine months, even though 12-month offers still exist. Some cards may limit the amount you can transfer. As for the balance transfer rate, it can vary from zero percent to around 5 percent. Those with better credit will likely score a better rate.

Take away

Make payments on time and whittle down balances. If your issuer raises your rate, lowers your limit or shutters your account, pick up the phone. When negotiation fails, shop around.