Are You Exposed to Short Term Rates

The Federal Reserve Bank raised the short term lending rate yesterday. Rates went from 2.75% to 3.00% on the Federal Funds Rate – this is the interest rate banks charge each other for overnight lending. It used to be that short term rates did not affect home mortgages, this is because most people were on fixed rate long term mortgages. Nowadays, with the popularity of Adjustable Rate Mortgages, Home Equity Lines of Credit and other creative financing more and more people are exposed to short term rates. The rate increase yesterday will mean that if you have a mortgage based on any short term index then your monthly payment will increase at the next adjustment period.

Alan Greenspan retires next year and at the beginning of this year he made it clear that he will be raising rates until the time he leaves – he wants to leave a neutral legacy – meaning rates slightly above inflation! So, rates are going to go up, I can help clients with exposure to this potential increase get better situated and stave off a potential crisis in early 2006. Just contact me with any questions you have.

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