There have been two FED rate cuts over the past two months – one in August and one in September – yet fixed rate mortgages are about .375% higher today than they were in July, just prior to the FED cuts .
How is that possible?
There is a misconception by many people, including those in the media, real estate, and even lending professionals, as to how mortgage rates are affected when the U.S. Federal Reserve Bank (the FED) issues rate changes. Most believe they move together and that a .25% FED rate cut will result in a .25% drop in mortgage rates. As I listen to the news, I can understand why they would think this as I often hear comments like …FED rate cut coming soon, good news for home buyers and homeowners.
However, as we just saw over the past two months, it is not unusual to see them move in completely different directions.
When the FED talks about lowering rates, they are referring to the Federal Funds Rate or “Target Rate”, which is a guideline for the actual rate that banks charge each other on overnight reserve loans. Banks will then use this rate as a guide for interest charged on things like home equity lines of credit, credit cards, and other variable or short-term loan rates.
Long term mortgage rates, like 30 or 15 year fixed rate mortgages, are influenced by the bond market, specifically mortgage bonds or mortgage-backed securities – long term instruments that are impacted by market pressures and inflation. And to the Bond market, inflation is not a friend.
When the FED cuts rates they often do so to stimulate economic growth. If the markets see this growth as an inflationary move, mortgage bonds will suffer resulting in higher fixed mortgage rates.
If the markets see a FED rate cut as something that may stimulate corporate profits and business expansion, money will typically move away from bonds and into the stock market. This move will also weaken bonds and result in higher mortgage rates. The latter was a contributing factor to the case in August and September.
In short, there is simply no direct correlation between a FED rate change and long-term fixed mortgage rates. Many market factors move the bond market and in turn mortgage rates – a FED rate change and how the markets receive this change is only one of those factors.
Unfortunately, unsavory lenders and online marketing firms know the consumer is misinformed here and tend to use the news of a “potential FED rate cut” as a way to attract loan applications by promising lower rates in the future.
If you or anyone you know is looking to purchase a new home, or refinance, make sure they speak with their trusted mortgage professional to get the facts in order to make an informed decision.
About the Author
Joseph Farella – Industry expert, award winning author, and Executive Vice President for American United Mortgage Corporation. Mr. Farella has guided thousands of home buyers and homeowners throughout the years. He is also the keynote speaker for Homeownership Now, New Jersey’s longest running educational event for first-time homebuyers.
Looking for expert advice – Joe and his team welcome the opportunity to be of service and are available to answer your questions at 908.322.5423, or by email at firstname.lastname@example.org.