How Does a Fed Cut Affect Home Mortgage Rates?

Who is the Fed? Well, it’s the Federal Reserve. & when the Fed cuts rates, it usually cuts the Fed currency Rate, which is the rate banks lend each other money. However, when the Fed lowers the Fed currency Rate, Prime Rate, the rate banks give their best customers, usually drops as well. Ok, that’s great. But what does that mean to the average person on the street? It means that anything that has an interest rate tied to Prime is directly affected by the Feds’ rate cut. Typically, these are short term loans. For instance: a credit card or a Home Equity Line of Credit (HELOC). In general, these rates decline when the Fed lowers rates. On the flip side, a Fed rate cut means your savings will perhaps not yield as much interest & your CD (certificate of deposit) won’t be at such a great rate. So, it’s not all nice.

You hear a bit lately that “the Fed is cutting the interest rate.” Maybe you’ve been considering a refinance, & you’re waiting to move forward till the Fed takes action again. But be smart about waiting & watching. A Fed cut doesn’t directly affect long term rates (for instance a 30 year fixed mortgage), but it does impact long term mortgage rates. The problem is the impact might not have the result you’ve been waiting for.

Another misconception is that mortgage rate changes occur in direct relation to when a Fed rate cut happens. In actuality, most mortgage rate changes, positive or negative, occur regardless of whether the Fed is actually meeting. That’s because the mortgage market anticipates what the Fed is going to do.

Why aren’t mortgages directly affected? Because mortgage rates are typically longer term rates & are influenced by buyers & sellers in the bond market. Daily movements in the bond market cause mortgage rates to modify. That’s why you might get a quote from a loan officer on Tuesday, & on Wednesday, your quoted interest rate has increased .125%. The Fed lowers rates to help stimulate the economy. Ultimately a healthy economy is nice for the real estate market. Jesse Lehn, Senior Vice President for Mortgage Investors Group, believes, “…a liquid real estate market is beneficial for the mortgage market & that keeps rates competitive.” So, when the Fed lowers rates, indirectly it can help mortgage rates, but there is no direct correlation.

A nice loan officer should have their finger on the pulse of the market, but again it’s a gamble. Remember to have a target interest rate in mind if you need to lock a loan but are watching the market. Trying to lock an interest rate on the day the mortgage rates have reached their lowest point in a year is like trying to get a royal flush in poker. It happens, but it’s not a realistic objective. It means you were lucky. stick to your home financing goals & consider the big image, & you’ll be fine.


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