The Federal Reserve has been on a rate cutting spree once more. Many mortgage applicants are calling their mortgage representative and expecting a lower interest rate. Others who have been waiting to refinance are puzzled as to why mortgage rates have not moved lower during the recent five Fed rate cuts. This is difficult to explain to consumers who have watched a 2.25% reduction by the Fed with very little benefit in mortgage rates.

Is a Fed rate cut really good news for mortgage rates? The facts may be surprising. The Fed can only control the Discount Rate and the Fed Funds Rate. This is very different from mortgage rates. A mortgage rate can be in effect for 30-years while a rate set by the Fed can change from one day to another.

It is often said history repeats itself. And if history is any teacher, we can learn from what happened to mortgage rates the last time the Federal Reserve was in a rate-cutting cycle.

The last time the Fed was in a lengthy rate cutting cycle was back in 2001 from January 3, 2001 to December 11, 2001. In the span of 11 months, they cut the Fed Funds rate 11 times with eight of those cuts by 50bp. This resulted in a total of 475bp or 4.75% in short-term interest rate cuts taking the Fed Funds Rate from 6.00% down to 1.75%. Now most uninformed people would naturally think because the Fed cut rates by so much during this time that mortgage rates would follow suit and trend lower as well. Not so. Mortgage rates actually moved higher during this time of significant rate cuts because inflation, the arch enemy of bonds, gradually rose.

Now let's take a look at what happened with the Fed's most recent cutting cycle, the first since 2001. On September 18, 2007 the Fed cut the Fed Funds Rate by 50bp. The mortgage bond market briefly enjoyed a “knee-jerk” reaction to the Fed move by closing higher that day, but lost 140bp over the following two sessions. Then on October 31, 2007 the Fed lowered the Fed Funds rate by 25bp. The mortgage bond market responded by losing 78bp over the following five trading days. On December 11, 2007 the Fed once again lowered rates by 25bp and the mortgage bond market lost 88bp in the next three days. This past month, the Fed delivered a surprise 75bp rate cut on January 22, 2008 and mortgage bonds lost a whopping 144bp in just 2 days. Eight days later and as widely expected, the Fed cut rates by 50bp and mortgage bonds had little reaction – but, were unable to recover the enormous pricing loss seen back on Jan 23, the day after the surprise 75bp cut.

Please refer to the Table below.

By Barry Habib, Contributing Editor to CNBC.com

In a short sale, a buyer pays less than the amount a seller owes the lender.  

There are more cases of 'short selling' in markets where home values are dropping.  

Typically, when a homeowner can't pay his mortgage because he has suffered some sort of hardship -- loss of a job or divorce for example -- he simply sells his home. But when home values are dropping, this can be a problem. In some cases, a homeowner might find he owes more on his mortgage than his home will sell for. In these cases, lenders will sometimes accept less than the amount owed on the home, assuming the homeowner doesn't have other assets that can be sold to make up the difference. The lender then doesn't have to go to the expense of selling the house at auction.  

The question you have to ask yourself is: Are you really getting a great deal?   If the house was purchased at the peak of rising home values, then the homeowner might have paid a premium price for the property. If values are dropping today, the lender may only be able to discount the property to current market values. So in that case, you wouldn't really be getting a bargain at all.  

You'll have to know what similar houses in the market are selling for to find out if you are getting a good deal.  

Find out how long the home has been on the market and make sure you get good inspections. A seller who is in financial trouble often can't keep up with repairs. You'll want to have a good idea what has been neglected.  

Short sales are tricky legal propositions. You'll want to make sure you have an attorney experienced in this sort of sale. You will also want to know who the lender or lenders are and remember the lender will be looking for a better deal than a short sale will offer so the lender probably will not instantly agree.

Points and the taxman

If you paid points to get a better rate on a home loan, you might be able to get a tax break.  

According to bankrate.com, you can deduct points the same year you paid them if the loan you took was to purchase or build the home you live in. Also, the points you paid had to be part of the established business practice of your community and it had to be within the usual range.  

You don't get as good a tax deduction if you paid points to refinance your house. The points are deductible, but only over the life of the loan. So if you paid $2,000 points on a 30-year mortgage, you would get to deduct a little more than $5.50 per payment you made during the year. If you made 12 house payments, you would get to deduct about $66 in point payments.  

But wait! On the other hand if you use the cash from your refinancing to do home improvements, then you can deduct some of the points (those made directly related to home improvements) in the same year you paid the points.

CMAs are only as good as the information in them. In Florida a CMA, otherwise known as a comparable market analysis, is given complimentary to prospective or existing clients. Agents currently can't sell them. An alternative would be to contact a certified appraiser for an appraisal. It's important to note that a CMA is a tool, but only one in an agent's toolbox. CMAs aren't appraisals by lenders, nor are they broker's price opinions. They are support documents that help an agent and seller understand recent neighborhood trends to determine a market price at which the home will sell. In other words, the CMA doesn't choose the price -- the homeowner and agent choose the price, based on the information.

CMAs aren't intended as free tools for sellers who want to market their own homes. Using the market knowledge, experience and time of a real estate agent without compensating them is a lousy thing to do, although that certainly happens. But Karma has a way of catching up with people like that -- those are the ones who typically overprice their homes, can't sell them, end up taking a bigger discount, and clearing far less than they would have with an agent.

For that reason, CMAs are fairly tightly controlled, presented at listing presentations or at substantive buyer's meetings, and taken away if the agent doesn't get the listing or a commitment from the buyer. Why give free information to put yourself out of business? Some agents are generous with CMAs, but if they are, it's a sure bet they didn't spend much time preparing it. In fact, some agent productivity software can spit out a so-called CMA in a few seconds.

What you want is a true in-depth market analysis, not a quick fix tool. A CMA can be a very personal document designed to help you understand the competition, yet it is done without destroying the agent's relationship with other agents, or their buyers and sellers. It's simply a compilation of homes for sale and those that have sold in a given area, without including your home for sale in the mix.

That said, a CMA can be rendered worthless in minutes. All it takes is the sale of a property, and all the variables change. A good agent will occasionally produce a fresh CMA for a client, to track how the market is changing, because it changes all the time.

If you are planning to sell your own home without the services of an agent, let me caution you. "Unrepresented sellers often do not understand the complexity, range and timing of tasks they will have to perform if they don't use a professional," says the National Association of Realtors (NAR.) For sale by owner sellers have dropped from an all-time high of 20 percent in 1985 to 12 percent of home sellers in 2006. You may wonder why, in this age of Internet marketing with free classified sites and other sites clamoring for free home listings, that sellers are less often choosing to market their homes themselves.

This is a subject with lots of varying opinions. But the short answer is NO, you don't need one. The longer answer is that while you don't NEED one it may be a very smart idea to use one.

First, I'm going to give you the facts: If you're using a Realtor®, they should use a contract for purchase and sale known as a FAR/BAR contract. This stands for Florida Association of Realtors® and the Florida Bar Association. These forms have been compiled and approved by committees from both associations and are accepted as the de-facto standard in Florida . Most contingencies can be accounted for and incorporated into this set of contracts. The vast majority of purchasers should have no issues with these contracts.

However (and there's always a however), if there's anything unusual or out of the ordinary, such as appraisal clauses, special financing clauses, etc., it is always a good idea to have an attorney review the contract. This can sometimes get expensive, so it's a very prudent idea to check around. A good Realtor® will have the names of local real estate attorneys that will review your contract at very little cost and sometimes for free.

If you're thinking of purchasing and/or selling a home in Martin County, Florida or Port St. Lucie, FL and have a question about contracts or procedures. Please contact me, if I don't know the answer, I'll get you in touch with the right person.

There has been a lot of talk about adjustable rate mortgages, subprime loans, and the like and you might be wondering if it is actually hazardous to buy a home! But nothing can be further from the truth. Remember that more than 97 percent of homeowners pay their mortgages on time. Buying a home is the great route to financial security.

The rules of smart home buying haven't changed. Simply put: Buy a home you can comfortably afford right now.

The first step is to get a loan with a good interest rate. To do that pay your bills on time to create a good credit rating. Next, save some money so you can make a down payment on your new home. The down payment combined with a good credit rating will give you an affordable interest rate and start you off with a little equity in your new home. Equity is the best insurance you can have against unforeseen events.

If you want to buy a home in the next two years, don't get yourself in a lot of debt with things like big new car loans.

If you can start off buying a home within that framework, you are doing the smartest possible thing. If you are buying what you believe to be your permanent home, a fixed-rate mortgage is best. The 15-year instruments carry lower interest rates than 30-year mortgages.

You can still buy a home if your credit isn't perfect or if you have new car payments or if you don't have a big down payment, but lenders will be tightening their rules and you will have a higher interest rate. Still, if you finance a house that you can comfortably afford right now, you will be making a wise move.

Interest rates also can be reduced by paying points (one point equals 1 percent of the principal). A new study by Penn State College of Business and economists at Freddie Mac, however, show that fewer than 1.5 percent of borrowers held loans long enough to make that decision pay off.

Many lenders offer better rates on loans that charge penalties if the loan is refinanced or paid off ahead of schedule. It's standard practice for lenders to charge six months' interest on 80 percent of an outstanding balance if the loan is refinanced or paid off within one to five years.

Advisers reporting in Business Week say the possibility of paying the penalty offsets any advantage of the lower interest rate.