What the Federal Rate Cut Means for Homeowners
Considering how volatile the Mortgage Business is today, now more than ever, it is important for people to deal with reputable mortgage specialists when arranging financing. Take the much-publicized rate cut by the Fed last week for example. The Federal Reserve lowered short-term interest rates by half a percentage point, to 4.75%, in order to combat the effects of a weaker housing market and tighter credit on the economy. While consumers should start to feel the impact in the form of lower borrowing costs, it is not the magic pill that is going to solve the mortgage worries. In fact, rates are creeping up to 6.5% this week for a standard 30 year. So what does it mean for the consumer?
First the Lucky Ones:
1: Borrowers holding loans tied to U.S. banks prime rate: Many banks cut their prime rates by half a percentage point after the Fed move. People with loans tied to this rate should see relief soon.
2: Borrowers with home-equity lines of credit: Savings could start next month. You should see better rates if you are in the market for a new fixed-rate home-equity loan.
3: Credit Card customers: Should soon see some relief. About 85% of all credit cards carry variable rates. Holders of these cards will see a benefit only if their current rate exceeds any floors established by the issuers, typically around 14% to 15%, below which their rates can’t fall.
The Unlucky Ones:
1: Most of the Adjustable Rate Mortgage holders: Most of these notes are tied to the London Interbank offered rate, Libor, which rose higher than the Fed rate because of the credit crunch in the markets.
2: Savers: Savers could soon see lower payouts on their savings accounts, CD’s and money-market mutual funds.
This week’s Real Estate Insight:
Examine your current mortgage contract and future loan agreements carefully. If you have an ARM or are considering one, know the underlying index your rate is tied to, when the mortgage will reset or shift to adjustable payments and what the margin is.
February 4th, 2008 at 4:12 pm
I would like to receive clarification - correlation between fed rate cut and home mortgage rates - especially the fixed rates. Last week, before the feds cut interest rates, the 15 year Fixed rate was at 4.75% at Tampa Bay Federal Credit Union. Two days after the feds .5% rate cut, the 15 year mortgage rate went down from 4.75% to 4.625% and not down to 4.25% which is what I expected.
My question is the following:
1. Understand the correlation between the Feds rate cut and home mortgage rates?
2. Will I ever see the rate down to 4.25% for 15 years?
3. This morning, the 15 year mortgage is actually up to 5.25% from last week\\\’s 4.625%. What is the near term projection?
Please let me know.
Thank you very much
Densingh
February 5th, 2008 at 8:46 pm
Lots of people have been asking Cherie and me the same question.The Discount Rate is the interest rate the Federal Reserve Banks charge depository institutions on overnight loans. It is an administered rate, set by the Federal Reserve Banks, rather than a market rate of interest. The primary conventional mortgage rate is a market-determined interest rate for long-term residential mortgage loans. A change in the short-term discount rate may not affect interest rates on long-term mortgages.
Depending on whom you ask, you’ll get a number of explanations of why mortgage rates are going up while the overnight rate is going down. One reason might be that investors are reacting to the Fed’s rate moves by selling bonds and buying stocks. The reduced demand for bonds makes their yields go up, and mortgage rates follow. If investors pull out of the stock market and invest in bonds, the rates will go down.
As far as the future of the rates, as I always say, if I had a crystal ball, I would be rich, but what i can tell you is even with the volatility of the past two weeks, interest rates are lower now than they were last fall, refi’s were up 22% last week, it is a great time to buy.