One of the biggest misconceptions in the mortgage and Real Estate industries is the fact that the when the Federal Funds Rate is dropped that it also means there will be a corresponding rate drop in 30 year fixed rate mortgages. People wake up - It does NOT! In fact many times the exact opposite occurs.
I can't even tell you the number of times I have been hearing lately people making the comment "Hey the Fed is thinking of dropping the rates again...Mortgage rates should be heading down". What can be even more shocking is when Realtors don't realize how things work either! A good Real Estate agent should have at least a basic understanding of how the mortgage market works - Many do not!
The underlying belief is that lower 30 year fixed rates stimulate sales. This of course is true but there is a disconnect between this happening when the government cuts the Federal Funds Rate.
Since January the Federal Funds Rate has been cut a number of times. In January of 2008, 30 year fixed rate mortgages stood at around 5.5%. In March they have been moving around between 6.25% and 6.5%. So since January when the Federal Funds Rate was cut longer term interest rates have moved up between 3/4% to 1%. This is the perfect illustration of why there is no connection.
The Federal Funds Rate helps determine what banks charge each other for over night loans. Long term rates (30 year fixed) are mostly tied to the ten year treasury yield which is determined by bond traders. Inflation drives long term mortgage rates. When bond traders demand higher long term rates it drives up long term mortgage rates too.
There is a much bigger correlation between The Federal Funds Rate and short term mortgage vehicles know as adjustable rate mortgages (ARMS).
These rates tend to move closer in step to the Federal Funds Rate. The adjustable rate mortgage market is influenced by a number of measures including the one year treasury yield and the International Libor.
So the next time you hear "The Fed is dropping rates" Do not assume that 30 year fixed rates will also drop!
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The above information regarding the Federal Funds Rate & fixed rate mortgages was provided by Bill Gassett, the team leader for the #2 RE/MAX
Team in Massachusetts in 2006.
Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-435-5356. Bill has helped people move in and out of Hopkinton Massachusetts and other Metrowest towns for the last 23 Years. Bill's office is conveniently located in the center of Hopkinton MA at 77 Main Street.
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