If you are a homeowner or prospective homeowner in Manhattan Beach or the Beach Cities you need to become very proactive about the the various types of home loans being offered in the current market. Whether you are an owner who is going to have to refinance or a buyer looking to purchase a new home, financing is going to be a key factor over the next few years.

It seems that the FED may have finally decided that inflation rather then recession is going to be where the monetary policy should focus. Bernanke has been very upfront that not only will the FED stop lowering the discount rate but may even up it sometime soon. This has brought about a lot of speculation in the market pushing rates up slightly but steadily. The Bank Rate Trend Index has most of the respondents looking toward further rate hikes. It's beginning to look as if the FED may buck the election year trends of keeping rates low and start tinkering instead.

While rates still are a bit lower then they were at this time last year I don't think anyone doubts that the trend is up. That said, rates are still very good. However, consumers are going to have to realize that the days of a 30 year 5.5% fixed loan are gone and adjust their thinking accordingly. They are also going to have to understand that they will probably not be able to refinance to a lower rate at any time soon and perhaps never. These may be the best rates we will see for years to come.

Is this catastrophic... no.. but it does mean that financing is going to be more of a consideration in the future then it has been. This is especially true for those who need to think about refinancing. I strongly urge anyone with a loan that will re-set in the next 18 months to talk to a lender now about refinancing. For buyers or current homeowners it means that making a choice between a fixed rate loan or an adjustable rate is extremely important.

If you choose an adjustable rate you will need to compare margins and the index... ie..Libor or Treasury notes with varying terms(these seem to be the most commonly used) as the basis of the rate. You should know how the index moves... is it fast or slow. Slow is good if rates are moving up but not so good when rates are moving down. The margin will be the most important factor in choosing a rate. This is the spread between the initial rate and future rate increases. Sometimes a higher initial rate with a lower margin will be a better overall choice then a low introductory rate with a high margin. I think a longer term will be a better choice then a shorter one for the next few years. Look for 7-10 year adjustable terms rather 3-5 years. Paying a point up front could prove to be more cost effective then a zero point loan. Have your lender run a number of computer programs to show you how the loan will work over the whole term of the loan not just the first two years.

Unless you have lots of cash available on a long term basis, negative amortizing loans are rarely a good choice. There are a few consumers who know how to use these loans effectively but most consumers only wind up in trouble with a negative amortizing loan. Interest only loans are another choice for a small group of savvy investors with cash behind them but again are not a great choice for most homeowners. Nor is a loan with a pre-payment penalty a good idea.

Consumers are going to have to be very selective about the financing they choose. Don't count on being able to refinance to a lower in a year or two if you don't like the loan. You may wind up having to live with the choice you make for a long time... so it's important to choose wisely.

June 19, 2008 UPDATE:

Dan Green has a terrific article on mortgage rates, inflation and the FED.