Feds cut Funds - How will this affect your interest rate?
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Simplified there are three main types of mortgages: Fixed-Rate Mortgages; Adjustable-Rate Mortgages (ARMs); and Home Equity Loans (HELOs).
Let's look at each type and see how they might “benefit” from a Fed “bailout”.
First, Fixed-Rate Mortgages. Through a complex, sometimes proprietary formula, they are based upon long term Treasury rates.
As the recent Fed Cuts were deemed by the majority of bond markets to be inflationary, long-term Treasuries have fallen in price and risen in yield. This actually raises the costs of new Fixed-Rate Mortgages.
Adjustable-Rate Mortgages — often sold with low so-called, “teaser rates” — and most Home Equity Lines are geared to the free-market London Inter-bank Offered Rate for Euro dollars, or LIBOR.
While LIBOR is not tied to the Fed rate, it is influenced by it. This is because a Euro-dollar is a U.S. Dollar, but merely one held by non-U.S. residents, and this subjects it to largely free market forces, rather than directly to a central bank.
Therefore, a cut in the Fed rate should, over time, bring down the LIBOR.
The Fed cuts should benefit both ARMs and most HELOs.
But, as everybody knows and even our Treasury tells us, “Credit is being re-priced!” This means that consumers with lower credit ratings will have to pay more for their loans — often much more.
It appears that the Feds cutting funds will not bring down mortgage rates but rather stabilize those rates keeping them within affordable means. But with the changes in the market it is more important then ever to shop around for your loans, just like you are shopping for that new home. Each one of these loans have numerous programs and you will need to find the one you can most afford.
If you would like more information or names of outstanding lenders, please visit our website. If you have any questions on a loan program you just might not understand please feel free to ask!