The federal government has enacted a new economic rescue plan that’s intended to ease the nation’s credit crunch and enable lenders to make more loans. That could be good news for individual borrowers, corporations and small businesses.

The Emergency Economic Stabilization Act of 2008, known as the “rescue plan,” aims to free up more credit for people who want to buy a home or car, refinance their existing mortgage or get other types of loans. Easier credit also could help businesses borrow money to expand their operations, buy raw materials for manufacturing or hire more employees. A businesses boom could help to reduce unemployment.

The rescue plan creates a federal Office of Financial Stability (OFS) in the U.S. Treasury Department. The OFS has been authorized to buy up to $700 billion of mortgage-backed securities and other financial assets from banks. The idea is that the rescue plan will grease the wheels of the financial system, so lenders will have more confidence and be able to make more new loans.

Plan aims to help taxpayers as well as businesses
The rescue plan also requires the OFS to encourage lenders and loan servicers to participate in Hope for Homeowners, a federal loan refinancing program. That program might help some homeowners keep their homes and indirectly contribute to more stabilized housing markets.

The rescue plan also increases the federal bank deposit insurance limit from $100,000 to $250,000 until Dec. 31, 2009. This insurance is backed by the Federal Deposit Insurance Corp. (FDIC) and protects depositors in the event of a bank failure. To find out whether your accounts are fully insured, call your bank or credit union or contact the FDIC at (877) 275-3342.

The rescue plan also updates a number of tax breaks for individuals and business. Millions of taxpayers will get relief from the alternative minimum tax (AMT) this year, and a property tax deduction for homeowners who don’t itemize their deductions has been extended. Ask your tax advisor for more information about whether these changes apply to your personal situation.

If you’re feeling less secure about your financial situation these days, you’re not alone. Job losses, stock market gyrations, tighter credit and Congressional debates about the economy have made many people anxious about their finances. Fortunately, there are some smart ways to respond to uncertainty about today’s economy and even find new opportunities.

To get started, here are five specific steps you can take to protect your finances right now:

1. Prioritize your goals.
Focus your attention on your top financial priorities. In uncertain financial times, it’s important to consider what matters the most to you, whether it’s building up an emergency fund, buying a house, saving for your children’s education or investing for your retirement. Now’s a good time to make sure you’re on track to achieve those major objectives. You might want to open a new savings or investment account to put aside the money you’ll need in the future.

2. Revise your budget.
In today’s economy, a household budget can help you economize and save money for your short-term and long-term goals. If you haven’t updated your budget for a while, get out your receipts, checkbook and credit-card statements, review your expenses and reprioritize your spending. If you can save even a little more each month, you’ll be that much closer to your goals and you may feel more financially secure.

3. Make sure your accounts are insured.
The Federal Deposit Insurance Corp. (FDIC) is a government agency that insures bank accounts against the possibility of bank failure. Financial institutions pay the premiums, and you get the protection. Most accounts are covered, but there are limits and not all financial products that you can get at your bank are FDIC-insured. Call your bank to make sure your accounts are in order, so your savings will be 100-percent protected.

4. Reduce your risk.
If you’ve set aside savings for an emergency or short-term goal such as buying a home within the next few years, you might want to invest that money in safe FDIC-insured accounts and deposit certificates (CDs) that won’t suffer capital losses. If you’ve put money that you won’t need within the next few years into other investments, don’t obsess over day-to-day ups and downs in your accounts.

5. Monitor interest rates.
Keeping a close watch on interest rates can help you manage your money more effectively because interest rates affect the finance charges you pay on your credit cards, car loans, mortgage, home-equity loans and other debts. If interest rates fall, you may be able to save by negotiating lower rates or refinancing your mortgage. If rates rise, you may want to put more money into interest-bearing accounts. Review your mortgage and make sure you understand whether your interest rate can be adjusted and if so, when and by how much. If you have reasonably good credit and at least some equity in your home, you may be able to refinance at an affordable interest rate.

© 1998 – 2008 LendingTree, LLC. All rights reserved. No part of this article may be used or reproduced without prior written permission of LendingTree, LLC.

Top officials in the federal government have been working on a new plan to strengthen the country’s financial system.

The bailout plan would allow the U.S. government to buy mortgage-backed securities and other assets from banks and financial institutions. The U.S. Treasury would then be able to sell those assets or keep them as investments. The goal of the plan is to protect the nation’s economy.

Treasury Secretary Henry M. Paulson, Federal Reserve Chairman Ben Bernanke and members of Congress have been working on the plan this week. The plan needs approval from Congress and the President’s signature to go forward.

The plan would be cheaper than other alternatives and would “fundamentally and comprehensively” address the root causes of the stress in the financial system, Paulson explained in a statement.

“When the financial system works as it should, money and capital flow to and from households and businesses to pay for home loans, school loans and investments that create jobs,” he said.

What the plan means for borrowers
The plan isn’t designed to bolster home prices or help homeowners who can’t afford their mortgage payments. Rather, it’s intended to unfreeze the financial sector, which could indirectly strengthen the housing markets over time. If that happened, homeowners would benefit.

The plan also could affect interest rates that borrowers pay on mortgages and other consumer loans, but right now it’s difficult to predict what the effect on interest rates will be. The government’s purchases of mortgages and other financial assets might make interest rates lower. But the government will need to borrow a lot of money to put the plan into effect, and that could push interest rates higher.

Given that uncertainty, borrowers should focus on their own personal financial situation.

As always, it’s important to:

• Educate yourself about loans and loan products.
• Figure out how much you can afford to borrow.
• Consider your own short- and long-term goals.
• Shop around for a loan that meets your needs.
• Read your loan documents before you sign them.

© 1998 – 2008 LendingTree, LLC. All rights reserved. No part of this article may be used or reproduced without prior written permission of LendingTree, LLC.

Interest rates on new home loans headed lower this week after the federal government stepped in to manage Fannie Mae and Freddie Mac, the country’s two biggest mortgage companies.

Fannie Mae and Freddie Mac are crucial to the U.S. economy. The two gigantic corporations were chartered by Congress to support affordable homeownership by creating a so-called “secondary market” to purchase home loans from lenders. Today, the two companies buy up nearly 80 percent of the new mortgages that lenders originate. They securitize many of those mortgages and sell them as investments.

Fannie Mae and Freddie Mac have been struggling financially due to the turmoil in the housing and lending markets and the weak U.S. economy. Those struggles, combined with investors’ concerns about the two companies, have kept mortgage interest rates higher than they otherwise would have been this year. But now that the government has taken over the companies, investors have rallied and interest rates have fallen on new home loans.

The government’s involvement will give Fannie Mae and Freddie Mac time to “restore the balances between safety and soundness and providing affordable housing and stability and liquidity,” said James B. Lockhart, director of the Federal Housing Finance Agency. The FHFA will manage the companies until they can resume their independence.

Federal Reserve Chairman Ben S. Bernanke said the government’s actions will “help to strengthen the U.S. housing markets and promote stability” in the financial markets. The Fed may consider these developments when its governors meet next week to talk about interest rates and the economy.

The government’s action to manage Fannie Mae and Freddie Mac won’t immediately turn around weak housing markets, but the plan has already reduced uncertainty and increased stability in the mortgage arena. That means borrowers who are shopping for a new mortgage today should see lower interest rates on home loans that conform to Fannie Mae’s and Freddie Mac’s standards. 

 © 1998 – 2008 LendingTree, LLC. All rights reserved. No part of this article may be used or reproduced without prior written permission of LendingTree, LLC.

The federal government has enacted a tax credit of up to $7,500 to encourage first-time home buyers to jump into the housing market. If you meet the relatively easy qualifications, you could find an extra $7,500 in your pocket as a bonus for buying your first home.

The requirements for the first-time home buyer tax credit are:

• You (and your spouse, if you’re married) haven’t owned a home in the last three years.
• The home you purchase must be your principal residence where you live most of the time.
• You need to buy your home after April 9, 2008, but before July 1, 2009.
• Your income is less than $75,000 if you’re single or a married head of household or $150,000 if you’re married and filing a joint tax return. If you earn up to $95,000 (single) or $170,000 (married couple), you may get a partial tax credit.

The First-Time Home Buyer Tax Credit is a true tax credit, not a tax deduction. That means the federal income tax you owe will be reduced dollar-for-dollar up to the amount of the credit.

For example, if you owed income tax of $10,000 and claimed the maximum first-time home buyer tax credit, your tax bill would be cut to just $2,500. If you owed $3,500 and took the maximum tax credit, you’d get a check for $4,000 from the government.

The caveat is that the first-time home buyer tax credit must be repaid. The repayment period is 15 years. That means if you took the maximum tax credit, you’d owe an extra $500 on your taxes each year. If you sell your home at a profit, you’ll have to pay back whatever you still owe. However, if you sell your home at loss, you won’t have to pay back another dime.

Like anything else that involves taxes, the rules for the first-time home buyer tax credit are complicated, so you should ask a tax professional for advice about your personal situation.

© 1998 – 2008 LendingTree, LLC. All rights reserved. No part of this article may be used or reproduced without prior written permission of LendingTree, LLC.

Are you concerned that your FICO score might stop you from getting a home loan? If so, you may have more options than you believe you have.

While it’s true that a higher FICO score will likely help you get a lower interest rate, you don’t necessarily need a perfect FICO score to qualify for a home loan today. On the contrary, many lenders make mortgage loans (often so-called “FHA loans”) to borrowers who have a FICO score between 620 and 679, and such loans are often a good option for borrowers with FICO scores in this range.

An FHA loan is a mortgage guaranteed by the federal government through mortgage insurance, which protects the lender and is paid for by the borrower. Because of this insurance, lenders are often more comfortable making FHA loans to borrowers who don’t have sky-high FICO scores.

An FHA loan might be a good fit for you if:

● You don’t have a high FICO score.
● You’re a first-time home buyer.
● You don’t have a lot of money for a downpayment.
● You want to minimize your monthly payments.
● You’re concerned that you might not be able to qualify for a conventional loan.

FHA loans tend to have competitive interest rates and be easier to qualify for than other loans. The minimum down payment will be just 3.5 percent of the home’s purchase price and can be a gift from a family member, friend or other source. Of course, you should always shop around to find a loan that’s right for your situation.

The only way to determine whether you’ll qualify for a home loan is to discuss your personal situation with a lender. If you have an acceptable, but not perfect FICO score, a steady paycheck and at least a small downpayment, you may be well on your way to homeownership.

© 1998 – 2008 LendingTree, LLC. All rights reserved. No part of this article may be used or reproduced without prior written permission of LendingTree, LLC.

The Federal Reserve yesterday decided not to change a key bank interest rate. The decision marked the second time the Fed left the rate unchanged this year after having lowered it in measured steps from 5.25 percent in mid-2007 to the current level of just 2 percent.

Financial analysts had anticipated the Fed’s decision, and many expect the Fed to hold rates steady until at least the end of this year. That means rates on home equity lines of credit, deposit certificates and savings accounts may not change much, though other rates may be more volatile.

In its statement, the Fed said inflation may ease up later this year and next year, but the outlook remains highly uncertain. Slow economic growth could put pressure on the Fed to lower interest rates while inflation could prompt the Fed to increase rates. The Fed’s decision yesterday attempts to balance the risks of slower growth and the prospect of higher prices.

Borrowers who are shopping for a loan should keep in mind that the Fed doesn’t directly set the rates on home or auto loans, credit cards or other types of consumer debt. Instead, the Fed sets short-term bank rates that indirectly affect the rates consumers pay.

Want to save an easy $105 this year? If you’re an average consumer, that’s how much you could cut your annual finance charges if you improved your credit score by just 30 points, according to a new survey released by the Consumer Federation of America (CFA) and Washington Mutual Bank.

Boosting your credit score by a mere 30 out of several hundred points might be much easier than you’d think it would be. According to the survey, these five strategies may be among your easiest opportunities for improvement:

● Pay all of your bills on time and in full every month.
● Don’t max out, or get close to maxing out, the limits on your credit cards or revolving credit accounts.
● Pay off your debts, rather than transferring your balances from one account to another.
● Don’t open multiple new credit accounts all at one time or in rapid succession.
● Check your credit report annually and take action to correct any mistakes that might have been made.

The survey also found that in some ways consumers have become better-informed about credit scores in recent years. But in other ways, consumers still harbor misconceptions and misunderstandings.

With that in mind, here are a few important points to remember:

● Your credit score is based on your history of using credit and paying your debts. Your personal characteristics such as your income, age, marital status, home state, education or ethnicity have no effect on your credit history or credit score.

● You can improve your credit score by using credit responsibly. For example, your credit score can increase if you pay off a large credit-card balance, but decrease if you make a late payment on a credit-card or max out your limit on a credit-card.

● You’re legally entitled to a free look at your credit report (but not your credit score) once each year. If you also want to find out your score, you’ll have to pay a small fee. An exception occurs if you’ve been turned down for a mortgage loan or credit-card. In that case, you’re entitled to a free credit score as well.

The bottom line is that the more you know about credit, the better prepared you’ll be to use credit wisely–and that can be easier on your wallet.

The federal government is poised to enact a major housing bill that aims to assist first-time home buyers, homeowners who need to refinance their mortgage and an assortment of housing-related companies.

The House of Representatives has already passed the 694-page bill, which is now being heard in the Senate. President Bush has said he will sign the bill, which could be on his desk within a few days.

The details won’t be official until the ink dries on the President’s signature, but here’s a summary of several key points:

FHA refinancing program 
A new FHA loan program would be established to help struggling homeowners refinance their mortgage with a new 30-year, fixed-rate FHA loan.

To qualify, the homeowner must:

• have an existing mortgage originated before Jan. 1, 2008,
• be unable to afford the payments on that mortgage,
• have a mortgage debt-to-income ratio of at least 31 percent (or potentially higher),
• live in the home and
• meet a number of other requirements.

The homeowner’s current lender would have to agree to reduce the amount owed on the existing mortgage to no more than 90 percent of the home’s current market value.

Borrowers who want to apply for this program should first contact their current mortgage servicer and then an FHA-approved lender. Borrowers will have to pay a monthly premium for FHA mortgage insurance, be reasonably able to afford the payments on the new mortgage and share a portion of future appreciation in the value of the home with the FHA.

First-time home buyer tax credit
Home buyers who purchased a home on or after April 9, 2008, or before July 1, 2009, and had not owned a home during the previous three years would be eligible for a federal income tax credit of up to $7,500. The credit would have to be repaid over a 15-year-period and would be phased out for taxpayers whose adjusted gross income exceeds $75,000 (single filers) or $150,000 (joint tax return).

Higher loan limits 
The maximum loan limit for FHA-backed loans would be increased to 115 percent of the local-area median home price. The maximum loan limit for loans that could be purchased by Fannie Mae and Freddie Mac would be set permanently at $625,500. The Department of Veterans Affairs loan limit also would be increased.

New Fannie Mae, Freddie Mac regulator 
A new federal regulator would be created to oversee Fannie Mae and Freddie Mac. The government’s thinking is that a new tougher regulator would enhance Wall Street’s confidence in the two government-sponsored mortgage companies. That could indirectly result in lower mortgage interest rates, which would be an added benefit for home-loan borrowers.

© 1998 – 2008 LendingTree, LLC. All rights reserved. No part of this article may be used or reproduced without prior written permission of LendingTree, LLC.

If you have an adjustable-rate mortgage (ARM) and are worried about the prospect of higher interest rates later this year, you might want to consider refinancing to take advantage of today’s still-attractive interest rates on fixed-rate mortgages.

If your ARM has already been reset or is scheduled to reset soon and your new monthly payment won’t be affordable, the decision to refinance your ARM may be simple. Yet the decision still should be made carefully since your mortgage is most likely your largest monthly expense.

In addition to the outlook for interest rates, other factors you should consider include:

• Your tolerance for risk.
• The interest rate caps on your current ARM.
• How long you intend to own your home.

If you refinanced your ARM today with a fixed-rate mortgage, you’d be protected from the possibility of higher interest rates and monthly payments in the future. That’s because a fixed rate means exactly that: The rate never changes over the entire term of the loan, be it 15, 30 or even 40 years. A 30-year fixed-rate mortgage originated today at 6.5 percent would still have that same 6.5 percent interest rate in the year 2038, when it would be paid in full.

Remember that refinancing usually extends the term of the loan, which results in a longer time–and more payments–until the loan is paid off.

Interest rates are already higher today than they were a year ago on 30-year and 15-year fixed-rate mortgages and most ARMs. The good news for borrowers, however, is that loan fees and points are lower, on average, than they were a year ago on some loan products.

Higher interest rates could be on the horizon if inflation, which refers to higher prices, forces the Federal Reserve to hike bank interest rates. The Fed doesn’t directly set interest rates on mortgages, auto loans or credit-cards, but its actions indirectly affect the general direction of rates that consumers pay.

Before you decide to refinance your loan, review your current ARM with your loan officer. Find out how much your interest rate and payment could increase and when each adjustment will occur. How comfortable–or uncomfortable–would you be if the worst-case scenario for your ARM came true? If that scenario makes you queasy, refinancing could be a smart way to protect yourself from that risk.

© 1998 – 2008 LendingTree, LLC. All rights reserved. No part of this article may be used or reproduced without prior written permission of LendingTree, LLC.