Friday, October 31, 2008


Will Mortgage rates drop since the Fed cut its rate?

On Wednesday, Oct 29th, the Fed voted to cut the Federal Funds Rate by ½%. This cut is seen as positive news for consumer loans, home equity lines of credit (variable rates) and adjustable rate mortgages. So, will fixed mortgage rates automatically drop too? NO, there is no direct correlation between the two rates.

Unfortunately the media isn’t always clear when these announcements are made. The economics underlying the cut is thought to be boring to the general public, and boring is not in the media vocabulary.

The Federal Reserve doesn’t control stock prices nor mortgage rates. Sometimes the rate change by the Fed can influence mortgage rates: sometimes in the same direction at the same time, but often they move in opposite directions. After the rate cut was announced on Wednesday, the fixed mortgage rates improved – for about 15 minutes. But then the mortgage pricing started to climb; within the first half hour lenders had issued new rate sheets indicating an increase of nearly .250.

Basically it’s short term vs. long term. The Fed Funds Rate is a short term interest rate. The FFR is a base for the Prime rate, with 3% added. The rate is adjusted by the Federal Reserve Bank to help control inflation, to help balance prices & stimulate economic growth, and to provide the financial markets with liquidity. The cost of short term borrowing is adjusted.

It’s the mortgage-backed securities market that influences fixed mortgage rates, not the Fed. Generally they are 30 year bonds (at fixed or variable rates), and are considered as long-term products. Investors often move their money into the stock market and out of the mortgage bond market when the Fed cuts rates. It’s these daily ups and downs in the bond market that causes mortgage rates to fluctuate.

With the most recent cut, the Federal Fund Rate is at its 50 year low, and we see mortgage rates closing in on their 3 year high point.

The Fed hopes to stimulate the economy with lower rates. In the long run, a healthy economy positively impacts the real estate market and that benefits the mortgage market by keeping rates competitive. So there is an indirect influence, but no direct tie to one another.

Feedack is always welcome so please send us your comments. You can call me at 913-642-3334, email me at or post comments on the blog.

Michele A. "MAC" Cole


1 comment:

Amy said...

Hi, Michele!