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Bi-weekly Interest Rate Update
Fed watch ~ Inflation
There are two widely used gauges for inflation, the Consumer Price
Index (CPI) and the Producer Price Index (PPI). The CPI measures
inflation on the consumer level and the PPI gauges prices received
by farms, factories and refineries. The Core CPI and PPI strip out
volatile food and energy costs to provide a better gauge of underlying
inflation pressures.
Last Thursday, December 15th the CPI number was released down 0.6
percent, 0.2 percent below the consensus estimate of down 0.4 percent.
The Core CPI came in at plus 0.2 percent, inline with consensus.
On Tuesday, December 20, 2005, PPI for November was released with
a larger than expected 0.7 percent drop, the biggest drop in 2-1/2
years, according to a Labor Department report. The core PPI increased
0.1 percent just below consensus estimates of a 0.2 percent increase.
What do these numbers mean?
The general consensus is the Federal Reserve, by raising interest
rates 13 consecutive meetings, has inflation under control and may
be nearing the end of the interest rate cycle. This is very good
news during a time of increased government spending, the high price
of gasoline and increased heating oil costs.
The next Federal Reserve Open Market Committee meeting is January
31st with the expectation of a .25 percent increase in the Federal
Funds Rate from 4.25% to 4.50%. This will bring the Prime rate from
7.25% to 7.50%.
Should you payoff your mortgage before you
retire?
I have many customers tell me they want to refinance into a fixed
rate mortgage with a monthly payment that is manageable and will
allow them to payoff their home at or near retirement. Is this a
good strategy?
Not having a mortgage payment at retirement is very appealing,
however is it the ideal strategy? The obvious advantage is not having
a monthly mortgage payment once you’re on a fixed income.
The disadvantages are; losing the mortgage interest deduction, and
having your assets tied up in your home, which does not produce
a monthly income stream.
I have customers who are financial advisors and they bring up a
valid point. For many of their clients, by planning in advance,
they have been able to put together a financial plan that will provide
monthly investment (stocks, bonds, mutual funds, cash & real
estate) income at retirement to help cover their mortgage payment
and at the same time have a growing investment asset of which the
principal can be accessed in a time of need. This financial plan
is setup in lieu of coordinating the payoff of their mortgage at
or near retirement.
As a mortgage consultant I have worked with retirees who have $500,000
to $1million dollars in home equity without a mortgage payment,
but are not earning enough retirement income to live a comfortable
lifestyle. Having all your assets tied up in a home that doesn’t
provide monthly income may not be the best use of your assets…
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I’m available to work with your financial
advisor (or refer you to a financial advisor) or accountant to see
which strategy is most appropriate for your situation. Feel free
to contact me via phone (760-310-6988) or email
to discuss your individual situation.
Have a Happy Holiday and a healthy &
prosperous 2006!
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