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Federal Funds Rate Drop v.s. 30 Year Fixed Rate Mortgages

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 RE/MAX Executive Realty Hopkinton MA 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.

I have a passion for Real Estate and love to share my marketing expertise! I would welcome the opportunity to earn your business.

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Posted by Bill Gassett Metrowest Massachusetts Real Estate on 03/26/2008 03:00 AM

Comments (60)

Mortgages in the Mortgage / Finance Channel

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Originally posted at: Massachusetts Real Estate: Federal Funds Rate Drop v.s. 30 Year Fixed Rate Mortgages

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60 Comments on Federal Funds Rate Drop v.s. 30 Year Fixed Rate Mortgages

MAR

2008

Hi Bill. As a REALTOR of 10+ years, I must admit that I just learned this a few weeks ago from a mortgage broker friend of mine. Glad you saw to post it as I think I'm not alone.

BILL - I flagged this for a feature. This is something that I deal with regularly with buyers, and I'm sure that many agents are unaware of how the rates work. Many agents don't take the time to learn basic mortgage knowledge, and then they misinform the public with their opinions that are not based on fact. Great post, Bill!

Bill - I love this post, Wish I could print it out and hand it to buyers. I just again explained this to another client...so many consumers do not understand this. Adam is right this should be feature. I'm flagging it also.

Link it just came to my attention recently how few people really know how the mortgage market works. I have always been interested in finances and the stock market so it was something I have been aware of for a long time.

Adam - Thanks for the flag I really appreciate it! It does make you wonder how some people can be in the Real Estate industry and not take the time to understand the basics. I ahve had to correct quite a few Realtors who have made misleading comments about this subject.

Sandra - Thanks! You can print it out :) Why not make your own post. I am sure your readers would appreciate it. There are so many that don't realize how things really work in the mortgage market!

Bill, great post. I know this info but have a tough time trying to explain it in the best terms - I like how you have done that! I would love to post a link to this from my outside blog.

Thanks Jo! I have no problem if you want to link to it from your other blog - that would be great!

Hi Bill,

Great info as usual on your part. And truthfully it's easy to understand why this is so confusing for consumers. They just hear something like this on the news and expect it to impact their loan application.

Bill, I hear it too, which just goes to show that most consumers don't understand the mortage business and it is prudent for lenders to explain very carefully all terms and conditions.

Lynda - Thanks. I think it is perfectly understandable that a consumer might not know but a Realtor should! It is our job as professionals to provide accurate knowledge. This is basic mortgage information that anyone that has been in the business for a few years should know. I wrote about this topic because I have heard so many Realtors speaking about this without a clue what they were talking about.

Missy - Agreed but as professional Realtors we should also be educating consumers.

Bill- We should have some knowledge in mortgages because then we know when our clients are being taken for a ride:) and can warn them. I have many times.

Katerina - You are so right! This is another topic we should all be familiar with. Having a good trustworthy mortgage rep to refer your clients to is really important.

Bill, when I started in real estate I actually had a few agents tell me not to really get involved with the financing end of the transaction...that's why we do what we do, and the mortgage people do what they do. Boy, they were sure wrong!! I think it's imperative to know the mortgage industry. I think we should learn whatever we need to so we can be a more responsible REALTOR for our clients.

I agree with Adam..this needs to be featured and I will send a flag as well.

Linda all of us Realtors should have at least a basic understanding of mortgages. We don't need to know mortgages like a mortgage broker does but we should be able to educate and answer our clients questions accurately. Thanks for your vote on a feature...it would be nice :)

MAR

2008

Bill,

This is one of the clearest explanations I've seen! I think it's very important that Lenders and REALTOR®'s alike understand this information. After all, consumers look to us for confidence in handling their transactions. If we don't know and understand what we're doing, how are they to feel confident?

Best,

Bill, that gold star sure looks good on you! Congrats on your feature! :-)

Excellent excshplanation of this confusing topic. Very succinct. Well-posted. Well done! :-)

Bill - Congratulations on the feature! ; -)

Bill It is so true, but even some real estate professionals think it does. I did a post a while back and I had a real estate professional tell me I was wrong!

Bill,

It's just another smoke screen so the consumer thinks the mortgage rates are dropping...so far since they announced the last few...I haven't seen too much light at the end of the tunnel.

Great blog. So many folks don't know this and it's tough to get folks to understand the concept!

Ricardo thanks I am glad the explanation for easy to understand as I am I will be able to help a few consumers understand how things really work.

Linda - Thanks for your support,,,much appreciated :)

Mara - Thank you Thank you!

Sandra - Thanks a million for your support and marking for feature.

You said it perfectly, in fact I have just booked marked this post! This is hard to explain to clients and I want to be able to send them to your post!

Nice work my friend

Russ I am not surprised a Realtor told you you were wrong at all. I was listening to multiple Realtors making comments that were completely false. It does really make you stop and think about all the mistakes that Real Estate agents make when they speak about things that they are not 100% sure about. Sometimes it is better to be a good listener.

Neal that is one of the most frustrating parts of it all. I have had some of my seller clients actually resist making a price change because they hear on the news that the fed is dropping the rate and assume incorrectly that long term mortgage rates are coming down too.

Cree - Thanks. It can be challenging at times because people hear things from so many different sources and don't know what to believe. It is our job as professionals to keep them informed about what the truth is.

Charles - Thanks! Feel free to make a post and link to it if you like :)

Excellent information Bill. I'm glad this is featured so hopefully more agents will get to see it...obviously there are some misconceptions out there.

Bill, it's important that this type of information gets disseminated to the housebuying public. I cringe every time a client tells me "The Fed just lowered rates so I should be able to get a great mortgage rate."

So true! This is a popular misconception about the 30 year fixed rates. Very helpful blog! Thanks!

Bill - I was among those who shared that misconception. I've gotten to learn quite a bit through this changing market.

Monika thanks there sure are misunderstandings about how the mortgage market works.

Brian - I hear the same thing all the time as well. It seems I have to explain this misconception all the time.

Great info Bill, So many people say oh fed cut rates interest should go down, uh no. You are so right us as realtors need to know this information. We are there to help our clients understand if we are feeding them the wrong information what justice are we doing for them. GREAT POST !!!

I just wrote a newsletter about this subject. It's a little difficult for buyers and sellers to comprehend how mortgage rates function.

I have been explaining this to clients the last few months. Everytime I see a rate cut, I cringe.

Bill - When I read the first half of your post I thought to myself that you are a mortgage professional and I was pleased with the way that you worded the post. As a mortgage professional I know that what you say here is true and I personally cringe when I hear that the FED is cutting the FED Funds rate. I know that immediately after there will be a couple of dozen calls from people mentioning that they just heard that the FED cut interest rates and expecting me to give them some kind of a miracle rate. When I read the second half of your post I realized that you are a Realtor® and I was again pleased that a Realtor® has such a good working knowledge on some of the stuff that affects us mortgage pro's on a day to day basis. I could not agree with you more when you stated that all Realtor's® should have a working knowledge of the mortgage industry and how it works. Good post... I hope everyone in the world reads it and stops begging me for a 4% rate and scoffing when I tell them that they qualify for a 6.25%.

I couldn't agree more. I know it is complicated, but all real estate agents should an understanding of the how the mortgage industry works. As far as the public goes, it is shocking to me that some very smart people don't get this either.

Great post, Bill.

What's just as sad is when the Fed lowers its Federal Funds rate, the local news is just as confused as most other people. It's a constant education process in explaining to people how it all works.

Great post, Bill.

What's just as sad is when the Fed lowers its Federal Funds rate, the local news is just as confused as most other people. It's a constant education process in explaining to people how it all works.

AMEN! Now how do we get this info out to the public? Would any newspapers or television news networks pick it up?

Kirk - Thanks I appreciate it.

Tom - Well I am surprised to hear that. I know you are big on Real Estate education.

Shannon, Diane, & Jennifer - Every Realtor should have the basics down when it comes to mortgages and how the markets operate. This is a subject where there is always misconceptions.

Chris I can see where this would create a dilema for you as well. Unfortunately many home sellers believe the same thing. They hear the fed is dropping the fed rate and expect that long term rates will drop creating more demand for their properties.

Mike agreed. We don't need to have the same in depth knowledge as a banker but we should know the basics.

Thanks for the input. Sometimes information like this slips away or is never learned. Keep on trucking!

Your welcome... thanks for dropping in and adding your comment Mike.

Hi Bill, I have had a lot of people say the same thing about mortgage rates will be going down because the fed is dropping the rate. Good post.

MAR

2008

Megan it really is a wide spread misconception amongst the general public. We just need to continue to educate.

Hey Bill,

Yes real estate agents do need to have basic information about real estate motgages. I meet many who do not know about any type of product

Anne you are correct. Realtors should have a basic understanding of how things work but unfortunately many do not.

Excellent information. There are a lot of misconceptions out there. I have a difficult time keeping up and I prefer to refer my clients to a good mortgage specialist as opposed to try and know all the ins and outs myself.

This is excellent. I must admit I never quite understood the difference between the federal funds rate and actually mortgage rates. This clears things up for me. Great concise work!

Only if they advertised this on TV.

MAR

2008

Brad thank you! I appreciate you stopping by and commenting.

Ronnell you are right it would make a lot so sense for this to get more exposure on tv.

APR

2008

Bill, good explanation. Now perhaps, everyone will understand 30 year fixed rates and how they are determined.

Gena - Thanks. I am sure this misconception will hang around. It would be great if the media explained things better! Why don't you ever hear the truth on TV about this subject?

APR

2008

Bill, great explanation of how the drop in Fed rates "really" works! ;-)

JUL

2008

Bill great explanantion on the diiference between a Federal Funds Rate drop and long term mortgage rates. I agree most people think they are the same.

Frank - Thanks. This is one of the biggest Mortgage/Real Estate misconceptions floating out in the public.

SEP

2008

Bill this is excellent information on mortgages. I must admit I was confused about this. You have explained this subject well.

Thanks Ben I know there is a lot of confusion when it comes to The Federal Funds Rate and how it pertains to 30 year fixed rate mortgages.

SEP

2008

Bill: Great post that reinforces many of my posts on my BLOG. As a result, you earned a RE-blog from me! Thanks for the great content and for clarifying an issue that many buyers AND agents are confused about!

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