Fed Rate Cut, How will it affect your mortgage?
Categories: Front Page, Mortgage News, Real Estate News
hiThe latest Fed rate cut of .25% to the key short term interest rates ( “Fed Funds Rate“) will generate another round of phone calls from consumers and others as
king about how this rate cut will affect them.
Well, the answer is, “ It depends!”
The rate cut does not necessarily drop the rates for a 30 year fixed rate mortgage. Those rates are driven by the long term treasury bond prices. Bond prices are more likely to be affected by the outlook on the economy and inflation, rather than any action by the Fed. It is true that the recent declines in the Fed Rate has helped to reduce the rates on the 30 yr mortgages, but that’s mostly due to the slower economic growth being predicted for the months ahead, but the decline has not been in lockstep with Fed rate cuts, or increases for that matter.
If you have a 5/1 adjustable rate mortgage, for example, you will benefit from this rate cut. Most adjustable rate mortgages are tied the 1 year treasury yield index. This index has plunged from about 5.0 percent in June to about 3.25% this month. On a $200,000 mortgage with an interest rate adjustment looming near, your payment increase is going to be closer to $150 a month as opposed to $370 a month before the Fed started cutting rates.
If you have a sub-prime mortgage or a an adjustable rate tied to a LIBOR (London Inter Bank Offering Rate) index, you will see no benefit. Unfortunately, the LIBOR index has moved in the opposite direction! This has been caused by liquidity issues on the global markets and will not be affected by anything that the Fed does. Almost all the sub-prime adjustable rate loans were pegged to the LIBOR index and there will no relief found by this decline in short term rates.
The most immediate rate cut will be enjoyed by anyone with a Home Equity Line of Credit. The rate on HELOC’s are tied directly to the Prime Rate and that rate is now at 7.25%. Most homeowners with a HELOC will have seen a drop of a full 1% in the rates that they pay.
And lastly, but most definitely not least, this latest rate cut will also drop the rates on credit cards and car loans and other short term consumer loans!
