The Federal Reserve Board met today and reduced the Federal Funds rate by ½ % but what does that mean for mortgage rates? The Federal Funds Rate is the rate of interest that banks are charged for short term loans and has a direct impact on the Prime Rate. Many variable rate credit cards and home equity line of credit loans are based on the Prime Rate and these loans will get cheaper after the Fed makes its move. If you have an Equity Line at Prime +1%, then you are currently paying 9.25% to borrow against it (Prime Rate was 8.25% and will go down to 7.75%). The Fed reduces by ½% then your rate will go down to 8.75% next month. That’s a good thing!
The question is will mortgage rates also go down by ½%? The answer, unfortunately, is no. The Federal Funds rate is a short term rate and affects other short term rates. Mortgages are long term instruments and are less affected by changes in short term rates. Plus, as you’ll see below, the mortgage market is more efficient than the Fed in making adjustments.
The Fed is reducing the rate in an effort to keep the economy from going into a recession and all interest rates are directly impacted by the general strength, or weakness, of the overall economy. So, when the economy is booming interest rates will be higher and when the economy is slow interest rates will be lower. The Federal Reserve is reacting to general weakness in the economy and is lowering the rate in an effort to stimulate business.
The good news is that mortgage rates have come down over the past 3 weeks because of the same reasons the Fed is now lowering the Federal Funds Rate. Fixed rate mortgages were at 6.75% a few weeks ago and have moved down to the 6.25% range today! Mortgage rates were not waiting for the Fed to take action but had already moved down over the last 3 weeks.
[tags]federal reserve, fed funds rate, mortgages, mortgage rates, ken mascia[/tags]