Thursday, January 31, 2008

Mortgage Rates vs Federal Funds Rate

Last week we saw the lowest mortgage interest rates any of us have seen -- for about five minutes anyway. It was so busy here with people wanting to lock in an interest rate I didn't even have time to write about it. Now the rates are back to where they were the week before and we're catching our breath.

But still, people want to know, if the Fed cut the rates yesterday, can't they get an even BETTER rate today?

The answer is no. In fact, several lenders are re-pricing for the worse today in response to a rallying stock market. When the media reports on this issue, it's always confusing for anyone who doesn't work in the industry. Thankfully published a really easy-to-understand explanation of what "the Fed cutting rates" means and what it doesn't mean.

It's always difficult to explain to people that the discount rate doesn't affect our rates in the way everyone assumes it should. Recently the prime rate was cut and if you have a HELOC, that's great news for you. But regular mortgage rates are determined by lenders, based on bond market performance and hedged against inflation predictions.

What that means is when the Federal Reserve cuts the rate at which it will loan to banks, the result is increased spending by manufacturers and businesses. This is how we avoid or reverse a recession and is inflationary in nature. Mortgage rates reflect the cost to borrow money plus the anticipated inflation rate. In other words, the rates are more likely to go up than down, based solely on THAT indicator -- still many indicators affect mortgage rates so they could always go either way.

Most of the "insider" buzz anticipates we've hit the bottom of the mortgage lending rates for the near future, but we'll see. Today the 30 year fixed rate is about 5.5%, which is about what it was a week ago too.

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