Hey man, My uncle’s house is in foreclosure. He is having a hard time paying the mortgage here in West Hollywood. I’ve been helping my uncle research about other types of home loans. We are exploring if we can apply for another home loan, or do a mortgage refinance. The unfortunate part of this is my uncle has bad credit. When he was doing research back in 2001, he was searching for bad credit mortgage loans, or home loans with bad credit. He got approved for his current loan when interest rates were at a historic low. He was approved with an Adjustable Rate Mortgage (ARM). Part of the problem of why he can’t make the payments has to do with the Federal discount rate. The Federal discount rate is the interest rate financial institutions borrow money at. Obviously, if the discount rate is 5.75%, the financial institutions, in order to make money will charge an interest rate greater than 5.75% on their loans.
From the Historical Changes of the Target Federal Funds and Discount Rates chart, you can tell that in early 2002, the Federal Primary Discount Rate was at 3/4%. Currently, the Federal Primary Discount Rate is 5.25%. That’s a 7 times increase lending rates to the institutions. So obviously, the lenders are mostly going to increase their interest rates by more than 7 times.