News and Events
February 1, 2008
Fed's Interest Rate Cuts and Mortgages
How does the Fed’s interest rate cut affect mortgage rates?
As I am sure most of you have heard the Federal Reserve (the Fed) has “dropped rates”, with possible additional cuts in the future. Whenever this happens the flood gates open for mortgage purchase and refinance calls. What starts on as excitement usually turns into confusion with the realization that the Fed’s movement did not lower the mortgage rates. What is important to understand is that when the Fed makes a move, it is a move on short-term interest rates. These include items like your credit cards and home equity lines of credit. Mortgage rates are long-term rates and are not directly affected by the change.
Mortgage rates on the other hand are determined by the investors that buy and sell bonds in the bond market. The Fed funds rate (the rate the Fed changes) does have an indirect effect on those long term rates, but the relationship is not as direct as you may think. Mortgage rates are driven by the market and can be affected by any global, political, or economic event. Generally speaking as the stock market falls, the bond market rises, then mortgage rates will start to fall. The opposite is true when the stock market is rising, then the bond market falls, and mortgage rates will start to creep up.
When the Fed makes a change, the best thing you can do to determine if a refinance or purchase is in your best interest is to call your mortgage loan officer. They will be able to talk you through the effects of the change and help you with your decision.
