The Fed has continued to lower the Fed funds rate through the first quarter of 2008. How does this affect the interest rate on my mortgage? Should I wait to purchase my new home until the Fed is done with its rate cuts? I’ve been thinking of refinancing, but should I hold off on this until the Fed has stopped cutting rates?The statement and questions I wrote above are on the top of everyone’s mind today especially if you are a home owner hoping to refinance or a potential home buyer.
I have attached an article here that will help dispel the myth that when the Fed lowers the Fed funds rate that it actually reduces mortgage rates by the same amount. The article is authored by market expert, Barry Habib. I have been a member of Barry’s online service called “Mortgage market Guide” since 2003. Barry’s service is a must for mortgage professionals that want to know exactly what is happening in the bond market and when the best time to lock or float interest rates for their customers.
Interest rates for mortgages such as the 30 yr. fixed loan, 15 yr. fixed loan, FHA, MSHDA, etc… are all based on the value of mortgage backed securities in the bond market. The Fed can only control the Discount rate which is what banks can borrower money at and the Fed funds rate. The Fed has no direct control over the bond market or how the 30 yr. fixed interest rates change on a day to day basis.
As bond prices go up, interest rates on mortgages go down. As bond prices go down, there is less demand for bonds and then interest rates go up. If you watch how the NASDAQ is trading throughout the day you should be able to see the bond market working in the opposite direction. When the stock market is doing well, there is less money going into the bond market. When there is less money going into the bond market, mortgage rates will drift higher due to less demand. When the stock market is having a couple negative days in a row, it’s likely that the investment dollars are flowing into the bond market instead, therefore helping lower mortgage rates.
The Fed reducing the Fed funds rates helps individuals and businesses that have shorter term loans that are tied to the prime lending rate. The reduction of the Fed funds rate often creates higher interest rates for long term mortgages that most Americans are concerned about. Keep this in mind the next time the Fed lowers the Fed funds rate which will be on March 18. It does not necessarily mean lower interest rates on your mortgage.