Does A Lower Fed Rate Result In Lower Mortgage Rates?
The Federal Reserve has been lowering rates to stimulate the economy. Does this mean that that mortgage rates will fall?
It is a 50/50 shot that a reduction by the Fed will result in a reduction in mortgage rates…read on.
Lets look at the 30-year fixed rate mortgage. A 30-year fixed rate mortgage is not tied to short-term interest rates like the Fed Funds rate. Fixed rate mortgage rates look to indications of long-term bond yields which move based on the outlook on the economy and inflation. Greater inflation will drive rates higher, lower inflation means lower rates. Recently the Fed has lowered rates and the 30-year fixed has come down, that is because of the outlook for slower economic growth or recession in the months ahead. One factor not tied to rates or inflation that has caused movement recently in rates is investor fear over the higher rate of delinquencies and foreclosures. Uncertainty in the market has caused great volatility recently.
Do the Fed Rate drops help adjustable rate mortgage holders?
It may or may not help. Many the index used in many adjustable mortgages is LIBOR which has recently decreased. LIBOR is not tied directly to the Fed Funds rate, so there is not a direct connection. If the Prime Rate is the index for the adjustable rate (common in Home Equity Lines of Credit) there will be a change.
Do the Fed Rate drops help those with Home Equity Lines of Credit?
You bet they do. Most Home Equity Lines of Credit are tied to the prime rate which moves with the Fed Funds rate. So you will see a reduction in the rate being charged on your Home Equity Line of Credit when the Fed Funds rate is reduced. On a line of credit with a $40,000 balance, a borrower will see a monthly reduction of about $8.33 for each 0.25% reduction in their rate.
Check out our story on Shopping Expired Mortgage Rates.
