Mortgages

The heavens are smiling down upon first-time homebuyers, according to Bob Walters, chief economist at Quicken Loans.

“If you’re a first-time homebuyer, the celestial stars have aligned for you,” Walters says.

The Federal Reserve decided this time to leave the federal funds rate unchanged. The announcement is unlikely to impact mortgage rates significantly.

However, what might have more of an impact is the federal government’s recent move to take over mortgage giants Fannie Mae and Freddie Mac, which already has caused mortgage rates to plunge by about a half-percent.

Mortgage rates fell because the government bailout reassured nervous investors that Fannie and Freddie will not be allowed to fail. This has eliminated a “risk premium” that kept rates artificially high, Walters says.

“A half a point is a lot,” Walters says. “You think of someone with a $200,000 mortgage, that’s saving them a $1,000 a year. That’s a big deal. It also means some people can qualify who couldn’t have qualified before.”

First-time homebuyers who can put down a substantial down payment should find entry-level bargains in many markets across the county, he says.

“I can’t underscore (enough) how people 10, 15, 20 years from now will say, ‘Yeah, I was one of the lucky ones. I was able to buy when the world was on sale,'” Walters says.

No surprise

Walters is not surprised the Fed decided to hold rates steady, especially in light of this weekend’s trio of shocks to the financial system — the bankruptcy of investment bank Lehman Brothers, the sale of financial services firm Merrill Lynch and the turmoil surrounding one of the world’s biggest insurance companies, American International Group.

A slowing economy and declining commodity prices have eased inflation concerns, allowing the Fed to keep interest rates low “in a market that needs all the liquidity it can get,” Walters says.

“These are very difficult times,” he says. “We just don’t know what’s going to happen next. I think there are more large institutions that will either fail or will be acquired.”

Although inflation concerns may be ebbing, worries remain about how long tight credit conditions might persist, Walters says.

“This is going to take a substantial amount of time to work through,” he says. “People love the baseball analogy and say, ‘What inning is this?’ I don’t know, but it’s probably closer to the middle than the beginning of the end.”

Peter Tatian, a senior research associate with the Urban Institute, says tight credit has prevented some borrowers from taking advantage of growing affordability in many housing markets.

“Prices have been going down in a lot of places, or at least not going up as fast,” says Tatian, who specializes in national and local housing policy. “So on that side, from an affordability side, it’s maybe a positive thing for people who want to buy. But still, if you can’t get a loan, then that’s not going to help you too much.”

However, Tatian sees a silver lining in today’s gloom. He says the new challenges of landing a loan are part of a necessary return to more sound lending practices.

“It’s probably going to take more work now than it used to, but in way that’s a good thing, because I think a lot of the bad actors have been removed from the market,” he says. “I think the options out there may be fewer, but there are probably better choices than what people might have seen a couple of years ago.”

Walters also sees reason for hope. He says stock market declines have been relatively modest over the past two weeks despite such seismic events as the government bailout of Fannie Mae and Freddie Mac and the bankruptcy of Lehman.

The fact that the stock market hasn’t collapsed — at least thus far — is an indicator that “the collective wisdom of the people who buy and sell stocks every day is that we can work this through,” Walters says.

“Everything was just stuck; you’re now seeing things starting to work out,” he says. “You’re seeing the winners and losers emerge, you’re seeing people taking responsibility for assets, you’re seeing things start to move. And that’s a good thing.”

Opportunity abounds

As Americans wait for credit conditions to improve, opportunity abounds for savvy home shoppers, Walters says.

Mortgage rates are likely to hover “in a high 5 percent or low 6 percent rate” range for the foreseeable future now that the Fannie Mae and Freddie Mac risk premium has been eliminated, Walters says.

“I think this risk premium is permanently gone, so that’s a plus,” he says.

Lower rates and falling home prices should make homes more affordable, especially for first-time buyers who can put down a substantial down payment, Walters says.

The news is more mixed for current homeowners looking to trade up to a bigger home, especially if they owe more on their mortgage than the home’s current worth.

“For people who own homes, it’s a double-edged sword,” Walters says. “They can go buy a home and get that deal of the century, but then they’ve got to sell their home. And if they are upside down, that creates a problem, obviously.”

Homeowners looking to refinance also should not delay, he says.

“To me, ‘sooner rather than later’ is the message,” Walters says. “Because if they wait and credit standards tighten further, they may find themselves unable to refinance.”

Meanwhile, Tatian urges home shoppers with less than sterling finances to remain hopeful.

“For people who are eligible, there are still some of the subsidized home purchase programs for first-time homebuyers and for others that are operating in many parts of the county,” Tatian says.

He also suggests tapping the wisdom of experts if you feel overwhelmed by all the challenges of today’s market.

“For people who feel unsure about things, getting some kind of counseling or help with home buying and what to look for in a loan would be a useful thing to do,” Tatian says.

Take-away

Call it a hat trick: For the third straight meeting, the Federal Reserve has left the federal funds rate unchanged.

The central bank’s rate decisions do not have a direct impact on mortgage rates, so potential borrowers should not worry about how Fed inaction will impact their loan.

However, home shoppers may find lower mortgage rates as the result of another development — the federal government’s decision to take the reins at mortgage giants Fannie Mae and Freddie Mac.

Bankrate’s rate tables can help you compare mortgage rates in 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.

— Chris Kissell

HELOC

Steaming over your inability to secure a home equity line of credit? If so, try to see things from the lender’s point of view.

“The bottom line is this: If you’re a lender and your collateral is the American home, you are not going to expand your underwriting guidelines until you feel that home prices have bottomed and are starting to ascend,” says Bob Walters, chief economist for Quicken Loans.

Recently, sliding home prices and a rise in borrower defaults have caused lenders to scale back new home equity lending and freeze existing home equity lines of credit for millions of homeowners.

Walters doesn’t expect that trend to end anytime soon.

“I think it continues,” he says.

Borrowing from home equity became fashionable during the housing boom, when millions of homeowners used their equity as a source of tax-deductible credit.

But lenders began turning away from home equity products once real estate prices began their recent free fall.

“Every measure shows home prices are falling, every measure shows that home sales are dropping,” Walters says. “Until that turns around, you’re not going to see an expansion in credit.”

In the past few weeks, the U.S. financial system has undergone a series of financial shocks — including the government bailout of mortgage giants Fannie Mae and Freddie Mac, the bankruptcy of investment bank Lehman Brothers, the sale of financial services firm Merrill Lynch and turmoil surrounding one of the world’s biggest insurers, American International Group.

Such widespread economic difficulties make it hard to imagine home prices stabilizing, let alone beginning to climb. But that day will arrive eventually, Walters says.

“There are natural bottoms to all prices and we will find them at some point,” he says. “When that happens, you will start to see mortgage products start to expand.

“But not until then.”

Take-away

The Federal Reserve left interest rates unchanged for the third straight meeting. That means borrowing costs on home equity lines of credit should remain low, at least for now.

Rates on existing home equity loans remain fixed, while rates on new loans do not move in tandem with the federal funds rate.

Earlier this year, many Fed watchers had predicted a rate hike in late 2008. The Fed itself previously hinted that hikes might be coming.

However, as change rocks Wall Street, the economy continues its sluggish pace and inflation concerns subside a bit, a rate hike looks less likely this year. It’s even possible that additional rate cuts may be in the offing.

Although it’s impossible to know the long-term direction of the economy — or of Fed rate policy — it looks increasingly likely that low HELOC borrowing costs will continue for a while longer.

Confused about whether to refinance or take out a home equity loan? Learn more in the Bankrate article “Refinance vs. home equity loans.”

Compare HELOC rates using Bankrate’s calculator and learn more about how to deduct interest on home equity debt in the Bankrate article “Taxes on home equity.”

— Chris Kissell

Auto

In the wake of the most recent crisis in the financial industry, the bankruptcy filing of Lehman Brothers and the buyout of Merrill Lynch, there are more questions than ever about the economy on both the macro and micro levels.

At least one thing is still certain — after the third Federal Open Market Committee meeting in a row at which there was no change to short-term interest rates, cheap auto loans are still easy to get for car buyers with good credit.

But the definition of good credit has changed recently.

“I’ve seen the definition of very good credit being raised; I used to say if you can be at 700, that should be your goal. Then it went up to 720 and in the last couple of weeks I’ve seen 740 as the benchmark,” says Gail Cunningham, senior director of public relations for the National Foundation for Credit Counseling.

If car shopping is in your future, work on your credit score now to get a good deal. That involves paying bills on time and cleaning up any problematic information that may be on your credit report. Use Bankrate’s FICO score estimator to find out what your score may be and then check out your credit report.

You can order a free credit report once a year from each of the three credit reporting bureaus to get an idea of what prospective lenders will see.

When the time comes to make the purchase, shop for the loan first.

“I think what people need to do before they go out to look for an automobile is to decide what kind of incentives they are looking for and what they can qualify for. They need to get prequalified before shopping,” says Mike Celuch, chief financial officer of Paragon Federal Credit Union in New Jersey.

Sites such as Edmunds.com and Automotive.com compile incentives offered by all major car manufacturers. If you qualify, choosing between a zero percent loan offer and cash-back can be a tough, but satisfying decision. Bankrate has a calculator to help you.

“Some people may be better off taking the cash-back and refinancing with a financial institution,” says Celuch.

Take-away

Most shoppers have two barriers to getting an inexpensive loan: a less than perfect credit score and a disinclination to shop around. A credit score needs a lot of time to rehabilitate, but shopping around is the easy part of the equation. You don’t even have to leave your computer to start.

Check out online lenders to find out what kind of rate you qualify for and then visit some local banks and credit unions before going to the dealer.

— Sheyna Steiner

CDs and MMAs

Take a good look at high-yield CDs.

Are you worried that some commercial banks may go the way of investment banks such as Bear Stearns, Lehman Brothers and Merrill Lynch? The crucial difference between investment banks and commercial banks, or their thrift brethren, as far as consumers are concerned is FDIC insurance.

Wachovia, a struggling commercial bank, is looking for deposits and offering a five-year, 5.35 percent CD. Washington Mutual, the nation’s biggest thrift, has a one-year, 5 percent CD. You may not want to lock up your funds for five years but certainly WAMU’s 5 percent one-year offering is a sweet deal.

Struggling banks are offering some very nice yields to boost their deposits. Wachovia has a five-year, 5.35 percent CD, and Washington Mutual has a one-year, 5 percent CD. You may not want to lock up your funds for five years, but certainly WAMU’s 5 percent one-year offering is a sweet deal.

Wamu is getting pounded every day in the financial news as the vultures wait for it to fail. But as long as you keep your deposits under the FDIC’s $100,000 limit, you needn’t worry even if the institution fails — and we’re certainly not implying that it will. However, if the thought of that makes you nervous, try negotiating with a competitor.

“If you’re at a bank that hasn’t been in the news, ask if they’ll match Washington Mutual’s rate,” says Jason Flurry, Certified Financial Planner and president of Legacy Partners Financial Group in Woodstock, Ga.

“If the conservative bank thinks that they might lose customers — especially long-standing customers — would they want to lose a relationship over 50 basis points? I see this pretty often with community banks. Take it to your bank and say, ‘I can go across the street and get this, what can you do for me?'”

If you want to keep your money liquid, check out this listing of high-yield money market accounts, some of which are paying more than 3.5 percent.

Take-away

Take the time to shop for the best yields. Stick with shorter maturities if you think rates will be rising soon. High-yield money markets and high-yield checking accounts — that don’t have fees or minimum balance requirements — are good alternatives.

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

— Laura Bruce

Credit cards

The Federal Open Market Committee, or FOMC, has left rates unchanged for the third time. So what does this mean for you and your credit cards? Maintain a high credit score and good payment habits.

Don’t slack off as a cardholder just because the variable rate on your credit card won’t rise due to a hike in the prime rate. As the mortgage meltdown continues to trickle into the card industry, expect closer scrutiny of your credit risk.

The financial turmoil at Lehman Brothers and Merrill Lynch won’t have an “immediate, direct impact” on the credit card industry, notes Greg McBride, senior financial analyst at Bankrate.com. But, he says, “The prospect of tight credit growing even tighter is one that will need to be watched very closely.”

“If you’ve got credit cards, do everything you can to hold onto them. It may not be that easy to get new ones, depending on you are,” says Linda Sherry, director of national priorities at Consumer Action, a national nonprofit education and advocacy organization.

To get the best rates on new cards, you need to have great credit.

Banks smarting from the subprime mortgage crisis are scrutinizing their cardholder base and scaling back risk. Many issuers are slashing the credit lines of riskier borrowers, and in other cases, not renewing inactive cards and raising the interest rate on certain accounts.

“Definitely people are getting hit with higher default rates and it’s not just for paying late,” Sherry says.

She cites Bank of America and Capital One’s infamous rate increases earlier in 2008 and last August, respectively, as examples of rate adjustments that didn’t result from late payments.

As a consumer, your best line of defense is a great credit score and a solid payment history. The story “7 tips for surviving the credit crunch” into more detail about how to avoid adverse actions.

To keep your credit score up, pay your cards on time, reduce balances and use emergency-only cards twice a year to keep them active. Purchase something inexpensive and pay off the balance.

Sherry recommends keeping balances under 50 percent of your credit limit.

“That’s just good credit management in general because many of the scoring models take into account how much of your outstanding credit limit you’ve accessed,” she says.

Fair Isaac, the developer of the popular FICO credit score, won’t specify a utilization threshold above which the consumer’s score plummets, but says the lower the utilization, the higher the score. Utilization comprises 30 percent of your FICO score.

Of course, managing your credit also means saving money and staying out of debt. The Bankrate feature, “How to be a savvy credit cardholder” explains the keys to credit card success. Use this work sheet to keep track of your accounts.

Take-away

Never give your issuer an excuse to make an unfavorable change to your account. Make sure payments arrive on time and keep balances as low as possible, even if you pay them off every month.

To prevent the closing of inactive cards that you’re saving for emergencies, Sherry says, “Make sure that you do use them occasionally, a couple of times a year, to make sure they know that you still want this card and this card is still active.”

— Leslie McFadden