Why The Fed Rate Cuts Won’t Lower Your Mortgage Rate.

A lot of people may be confused about the recent Fed rate cut. I’ve had people call and ask, can I refinance my home for 0% because of the rate cuts?
The answer is no, and a lot of people don’t realize the federal interest rate and mortgage rates aren’t the same thing.

The prime lending rate is the rate the Federal Reserve charges banks for borrowing money. There is no direct correlation to mortgage rates which are determined by the auctioning of bonds.

The big reason there is no correlation between the two is that the bonds that determine the mortgage rates trade thousands of times a day, and lenders themselves update rates at least once a day. The Fed, on the other hand, meets 8 times a year to consider changing its rates. (except for in emergencies like on the 15^th of March.) The Fed is well behind the market, which reacts faster in these situations, which can help determine what the Fed might end up doing.

The Federal Reserve also have implemented a Quantitative Easing program where they will purchase up to $200 billion in Mortgage Backed Securities (which is what determines mortgage rates) so that mortgage rates will go down when these purchases occur.

This will help restore the correlation between 10 year Treasury yields and mortgage rates, but it won’t restore space between the two immediately.

When the rates were at record lows earlier this year, there was a huge increase in new mortgage debt because of the amount of refinances. This helped with the disconnect between mortgage and treasury yields. In order for mortgage lenders to keep lending, they need to sell the mortgages to investors. The high amount of sellers and not enough buyers led to low mortgage prices and higher rates. This on top of the rapid fall in rates, which caused people to pay off debt faster, and investors earn less interest, they would then pay less for mortgages, causing higher rates.

We have no way of knowing when the Fed will be using the money but in general rates should move lower as the Fed uses the Quantitative Easing to help stimulate lending and economic growth. This will definitely help but is not meant to fix the volatility.

Your best bet is to get your loan application in and keep your lender updated with everything they need, so you are ready to take advantage of lower rates. The market is so volatile it’s best to be ready.

Source: http://www.mortgagenewsdaily.com/consumer_rates/938844.aspx

More Reading: http://amp.mortgagenewsdaily.com/article/939364