A common misconception is that all mortgage rates drop when the Fed cuts interest rates. The truth is that the exact opposite may be the case. When you hear that the “Fed cut rates today” the reference here is the Federal Funds Rate, the overnight lending rate that the Fed uses with other banks. The stock market often gets excited about the lowering of this rate because short-term borrowing becomes cheaper, generally increasing economic activity for businesses. However, homeowners with 15 and 30-year fixed mortgages shouldn’t be so sure that a lower federal funds rate will equal a refinancing opportunity.
When short-term rates are lower, the bond market often interprets that as higher long-term rates to come in the future. I held this misunderstanding last year when I closed on my apartment and got very frustrated when the Fed lowered rates and my 30-year fixed loan actually nudged up an 1/8th of a point. Inflation concerns can help nudge mortgage rates up as well following a reduction in interest rates. With food and oil prices at all time highs, the Fed is only willing to lower interest rates because the economy seems to be headed for a recession. Inflation concerns cause treasuries to sell off, pushing the yield higher–and generally the mortgage rates with it.
Remember, if you have one of those ARM loans which adjust in the short-run, the Jan 30th rate cut could be very helpful. It makes it less likely your payment is going to skyrocket in the short-term. It’s really the long-term, fixed-rate mortgage holders that need to look for other economic indicators. Right now, for example, the sub-prime mess is making it more difficult to obtain a loan. At the same time, the housing market has softened in many parts of the country. This has brought rates down almost a full point over the past 6 months.
Good luck with your mortgage shopping. If you are considering a refinance and want to throw around some ideas, feel free to send me an e-mail.
Premier Financial Advisors
14 E. 60th St. #402
New York, NY 10022
Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.