Home loans: Fed cut and mortgage rates

Very often we hear of Fed cutting interest rates. People who have refinancing plans await Fed’s steps before proceeding. Well, this is not a bad practice but it should be borne in mind that actions taken by Fed need not always benefit the borrowers. Usually long term loan rates are not affected by interest rate cuts by the Fed. Sometimes the impact of the cuts on the mortgage rates might not be the expected ones too.

To begin with, Fed is the Federal Reserve. Thus when there is a cut in rates by the Fed, Fed Funds Rate is actually cut. This is the rate at which banks lend money among each other. Thus when the cut is facilitated, the Prime rate which is offered by the banks to its customers also drops. Thus to the average common man the impact is through rate cuts in HELOCs and credit cards. The rates applied to these debts are directly linked to Prime rate. Ts.

Home equity line of credit rates declines with Fed rate cut. This cut also means that your savings would now yield lesser interest and the Certificate of deposit would not be as valuable as before. Thus there is a flip side to Fed rate cuts. As for mortgage rates, they are influenced by selling and buying of bonds in the market.  These are typically long term loans impacted by the daily bond market movements.

Economy is stimulated when there is a cut in fed rates. A lowering of rates usually makes the economy healthy, and a healthy economy is beneficial for the real estate market. Thus this real estate activity brings about a change in the interest rates of mortgages. When the real estate market is liquid, mortgage market is benefited. Thus there is no direct relation between mortgage rates and interest rate cuts by the Federal Reserve. Of course, lower rates can indirectly have an effect on the mortgage rates.

There is a misconception that change in mortgage rates is in sync with Fed rate cuts. Actually they have no direct bearance on each other. The mortgage rate change occur independent of Fed meetings. There are speculations and anticipations regarding their actions, since the mortgage market is always aware of the Federal Reserve.

A good loan officer would have his finger on the pulse of the market. Remember, all loans are gambles and with interest rates fluctuating the risks are increased. It would be advisable to have a target interest rate if there are plans to lock a loan. This should be accompanied by close scrutiny of the market. If you are lucky you might be able to lock the loan when interest rate is the lowest in the year. This is like hitting the jackpot. Thus the occurrence of such an event is rare and not realistic. Luck is shining if this becomes a reality. IT is wiser to abide by home financing goals and play safe. Take decisions based on the present conditions and try to get the best out of it.