Suze Orman on Fed Funds Rate

Suze Orman talks about the fed funds rate and how lowering this rate will not help lower rates on adjustable rate mortages.  She suggests that lowering the fed funds rate will not help existing mortgage holders since rates could be reset at much higher rates.

She discusses how the prime rate is calculated; essentially it is the fed funds rate plus 3%.  When ARM's reset, the interest rate will be nearly 1 to 3% higher than prime.  Many homeowners took out adjustable rate mortgages at very low rates back in 2003 to 2004 timeframe when the fed funds was 1%.  The rates could be significantly higher if the fed funds rate is higher.

The federal reserve has lowered the fed funds rate to historically low levels as of 2009.  This may actually lower your interest rate when it comes time to reset.  However, it is very imporatnt to understand that once the fed funds rate starts moving back up, it can dramatically increase your interest rate.
Tim Ord
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