It was a little after High Noon today in Colorado when CNBC interrupted their broadcast of House hearings on the $165 million AIG had paid out in bonuses. The voice sounded similar in quality to the one we hear when programs are interrupted for severe weather warnings. It was not a weather warning but an announcement from the monthly Federal Reserve meeting.
The Fed was keeping interest rates at 0%, as expected, but they announced that they intended to keep them there for the coming months. They announced a plan to increase their purchases of long term Treasury notes by $300B and extend another $750B to buy mortgages. That puts the total Fed commitment to mortgages at $1.25T.
Within 5 – 10 minutes after the announcement, both the stock market and Treasury notes shot up about 2%.
So what! It’s not as exciting as the video of Brittany Spears practicing her dance routine for her upcoming tour. It’s not as fantabulous as a preview of the upcoming Jonas Brothers concert movie. It’s well, adult exciting. No, not that kind of adult excitement, you perv. The other kind of exciting, the green kind.
Now is the time for mortgage holders to start talking to a mortgage lender near you about refinancing. Average 30 year fixed mortgage rates were just a scosh below 5%. The Fed’s announcement will probably cause the mortgage rate to drop to 4.5% or so.
A fairly close approximation of the monthly principal and interest payment (PI) on a 30 year fixed mortgage at 4.5% is to chop off the last two zeroes on the amount of the loan, then divide by 2. For example, take a $200,000 amount, chop off the last two zeroes, which results in $2000. Divide by 2 and the PI comes to $1000. The actual amount, using a mortgage calculator , is $1013.37. Close enough for government work.
For anyone who might have an existing 6.5% mortgage rate, which was approximately the norm a year ago, the monthly payment reduction on a $165,000 balance is over $200 a month.
B.J. made a comment a few weeks ago that the government should just reset all mortgages, by fiat, to 4%. That is a sweeping government intrusion into the private marketplace, more extensive than the government has already done.
B.J. must have spoken to Ben Bernanke, the Fed chief, who agreed with her target interest rate. He just went about it without issuing an emperor’s decree. Instead of picking the cats up and taking them where he wanted them to go, Bernanke simply put the food down where he wants the cats to be.