We all hear in the news the speculation that Ben Bernanke and the Federal Reserve Bank might cut rates - but do we all really know what that means? Specifically, for those of you who are considering purchasing a home, refinancing, or opening a Home Equity Line of Credit - the rate change might not have the impact that you think.
New & Refi-Mortgages. The act of the Fed moving the short term rates has no direct effect on the mortgage rates as they are quoted. WHY? Because mortgage rates are based upon the trading of mortgage backed securities. The indirect effect of these rate changes actually happens days or weeks before the actual change when all of the "talking" is taking place in the media - when the change actually takes place you might see an oposite affect and rates go up.
The Fed raises rates to fight inflation and lowers rates to spark the economy. Right now - there is a need for both. The fear of inflation forces bond pricing (and the pricing of mortgage backed securities) to go down and rates to go up. The reason for this is because with inflation, bonds lose value over time and therefore aren't worth as much. In addition to bond pricing, there are many other factors that effect the pricing of mortgage backed securities - therefore you won't see a direct correlation between a Fed Cut and the rates available for your next loan.
Home Equity Lines. However, when the Fed adjusts the short term rate, it does effect the Prime Rate and most Home Equity Lines of Credit (HELOC) are tied to the Prime Rate. (Prime Rate is equal to the Fed Funds Short Term Rate plus 3%.)
So when is it the best time to take out a new loan or lock in rates? I highly recommend working with a lender who regularly tracks this information and can explain it to you. If you need a referral to a lender who does this -please consider talking to one of my favorite lenders, Bryan Gorder. (Most of the explanation above, came straight out of an email that Bryan sent to me.)
By Michelle Blue
Your Guide to Woodinville Community, Neighborhoods & Real Estate.
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