By Dustin R. Burke, Adonai Financial

As recently as yesterday the Federal Reserve lowered the Fed Funds Rate another 75 basis points (or .75%) and the misconception from consumers is that mortgage rates will soon go down too.   Unfortunately, it's not really that simple because the Fed does not raise or lower interest rates offered to individuals. 

The Fed Funds Rate is the overnight target rate for the costs of bank to bank lending.  And the rate is just that: a target rate that will wax and wane depending on demand. 

Comments from HSN state:  Mortgage borrowers need to be conscious of the fact that fixed mortgage interest rates often rise after the Fed has trimmed short-term interest rates. Why? If one of the tonics for a weak economy is lower short-term interest rates, and the Fed obliges, a growing economy becomes that much more likely to occur. A growing economy -- especially at a time of firm or rising inflation pressure -- will tend to press long-term interest rates upward.

So, what does that mean?  It means long term rates will probably be on the rise.  In addition to inflation working to keep long term mortgage rates higher, perhaps more important is that mortgages remain out of favor to investors.  In order to persuade investors to buy mortgage back securities (with affect long term mortgages) higher yields, resulting in higher rates, are required. 

Short term rates are likely to move lower depending on the index used to determine the rate.  Lower overnight rates have served to move short term mortgage rates lower.  Most notably, the LIBOR has benefited for the fresh cash injected into the markets.  Treasury values also remain at multi year lows.

The Prime Rate will most likely move lower as a result of the most recent Fed action, however the banks may not pass the savings to the consumers right away.  A report by CNN stated that many banks are using the money (and savings) from the Fed Funds Rate to purchase Treasuries, which have a higher yield.  The banks are doing this to improve the appearance of the balance sheets after being hit hard by the mortgage crisis.  So, the savings on the prime rate may not be felt right away.

As you can imagine there is way too much information to include here, but its easy to get more information.  If you would like more information on mortgage rates, or how the Fed Funds Rate affect you please let me know.  You can reach me at 863-680-2700 or by sending me an email to dustin.burke@adonaifinancial.com.

"Adonai Financial, your friends in the mortgage business!"

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Copyright © 2008 Dustin R Burke | All Rights Reserved

Portions Copyright © 2008 Adonai Financial Corporation | All Rights Reserved

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Adonai Financial Corporation

http://www.adonaifinancial.com/

---The content of this blog is my opinion---