Yesterday's interest rate cut is good news for real estate investors

Yesterday's interest rate cut is good news for real estate investors Posted: 19 Mar 2008 07:13 AM CDT From a real estate investors perspective, the news here in the States continues to get better and better. Yesterday, the Fed declared another interest rate cut, dropping the short-term interest rate three quarters of a percent. This rate drop spurred one of the largest single day gains in the stock market. Here is a quote from Chicago Tribune.com about the rate cut: Bank of America economist Mickey Levy predicted that the Fed will reduce its key interest rate to as low as 1.5 percent before stopping. Lower Fed rates will have a positive impact on adjustable-rate loans, such as home-equity lines of credit, and will add money to the pockets of some consumers. But people with bank certificates of deposit are likely to see lower returns on their savings after they mature. I underlined the important sentence in the quote above. Yesterday's rate cut may mean lower loan payments for investors with adjustable rate mortgages. In other words, as interest rates decrease, the cash flow from our real estate investments increases. Here is another quote on the impact of the interest rate cut from CNN Money.com: The Fed began a series of cuts to its key interest rate last September, taking the rate to 2.25%, from 5.25%. ARM borrowers may get help. There is more of a connection between Fed rate cuts and short-term and adjustable rate mortgages (ARMs). In fact, homeowners with ARM loans could see lower rates from further interest rate cuts. Adjustable rate mortgages are pegged to a number of different indexes, including the one-year Treasury yield and the international Libor, or London Interbank Offered Rate, which tend to move with the Fed funds rate. With Tuesday's rate cut, the cumulative effect of the Fed cuts could entirely offset what would have been a significant rate reset for many homeowners. For instance, a borrower with an adjustable rate of 4.5% could have faced a rate reset up to 7.5% before the Fed started cutting rates in September. Before the rate cuts, that homeowner would have seen an increase of $370 in monthly payments on a $200,000 loan. But after Tuesday that rate could reset only a little higher. And for some, the rate might not go up at all - and may actually drop - according to Greg McBride of Bankrate.com. "The Fed rate cuts far are more significant to [borrowers with ARMs] in terms of staving off delinquencies on loans," he said. Many home sellers have their homes listed for sale because they are concerned about looming large interest rate increases on their adjustable rate mortgages. With this interest rate cut, these sellers may not need to sell their homes. This could eventually reduce the inventory of homes listed for sale. This is good news for the real estate market. Investors thinking of buying property may need to consider taking action now. Rob Minton