Surely you heard the news yesterday the “Fed is going to cut interest rates” again, and you might think that means lower interest rates on your home loans. Well…it isn’t so cut and dry. For an explanation, we asked our go-to mortgage broker, Tim Wood of Opes Advisors for a little clarification:

What the Fed rate cut means and doesn’t mean

“One of the greatest potential sources of confusion for prospective mortgage borrowers is the relationship between the Fed and mortgage interest rates. And I am often asked if the Fed rate cut will have an effect on mortgage rates? The answer is almost always “NO.”

The Fed meets to change the Fed Funds 8 times a year. Mortgage Bonds, the actual financial instrument that underlies mortgage interest rates, change 8 times a second. By the time you’ve read about a “Fed Rate Cut” the markets have LONG since “priced it in.” In other words, the (probable) rate cut is old news and has already been accounted for in today’s interest rates.

Yesterday, as expected the Fed cut rates another 25 basis points. This marks the third time the Fed has cut rates in as many months.

Here’s what the move means and doesn’t mean for the average American:

It won’t mean much for your 30-year mortgage.

It’s easy to think the grass is greener—or lower—on the other side of the Fed’s actions. However, there really isn’t much of a relationship between (long term) mortgage interest rates and (short term) Fed interest rate cuts. In fact, mortgage interest rates have recently been trending higher and the Fed announcement will affect their trajectory.

It will make existing home equity loans & new Home equity loans cheaper.

Most home equity products are priced based on the prime rate. A reduction in the Fed funds rate will result in a corresponding drop in prime and lower home equity rates for borrowers. New borrowers will have cheaper access to credit, and those who already have a home equity line will see lower monthly payments.

It might mean your credit card payments become more affordable.

Most credit cards are affected directly by the prime rate, so consumers should begin to see a small cumulative impact from this third consecutive cut. When combined with cuts in July and September, consumers will have seen an overall decrease in 75 basis points in rate since the summer. However, another 25 basis point decrease won’t result in a dramatic change to a customer’s monthly credit card bill. While the initial impact may not feel seismic, the third consecutive rate decrease serves as a small but welcome early Christmas gift from the Fed, as many consumers are gearing up to use their credit cards through the holiday season.”

There you have it.

You can reach Tim @:
[email protected]
Direct: (415) 464-1374
NMLS #319539

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