"Now that the Fed has cut rates, when will my home mortgage payment go down"?

It never fails. The minute the Feds announce a rate cut, the phone starts ringing with questions like that. Or Home buyers calling to ask when mortgage rates will be going down so that they can schedule their new home search to correspond to a favorable rate.

Lets face it, I've never explained very well the disconnect between Fed Fund rates and long term mortgage rates or what mortgage rates for home buyers are based on.

So I'll cheat.

It's Candy Olsons fault. Candy's our friend and very trusted Senior Loan Officer @ Silver Ridge Mortgage.

Candy sent us a simple article by Barry Habib, contributing editor to CNBC. It's short, but we think it's worth quoting for all of our folks that are interested in how the mortgage market will effect their home purchase.

Barry Said

So the Federal Reserve cut rates again. Many mortgage applicants are calling their mortgage representative

and expecting a lower interest rate. Others who have been waiting to refinance are puzzled as to why mortgage

rates have not moved lower during recent 5 Fed rate cuts. In fact mortgage rates are now higher than they

were before the Fed began cutting rates by in January. This is difficult to explain to many consumers who have

watched a 2.5% reduction by the Fed with no benefit in mortgage rates.

Is a Fed rate cut really good news for mortgage rates? The facts may be surprising. The Fed can only control

the Discount Rate and the Fed Funds Rate. This is very different from mortgage rates. A mortgage rate can be

in effect for 30-years, a rate that is set by the Fed can change from one day to another.

Another common mistake is in thinking that 30-year Treasury bonds or 10-year Treasury notes are directly

pegged to mortgage rates.

Those are government securities that are backed by the full faith and credit of the U.S. government and have

no direct effect on mortgage rates.

So what are mortgage rates based on? As it turns out the answer is mortgage-backed bonds known as

Mortgage Backed Securities (MBS). Bonds issued by Fannie Mae and Freddie Mac (MBS) and the trading

performance of those bonds will determine the direction of mortgage rates. Finding the catalyst that causes

mortgage bonds to move will give you the keys to finding out what makes mortgage rates rise or fall.

We know that inflation will always be a negative for any long-term bond because it eats away at the future

returns. Since the bond will pay a set amount over a long period of time, that amount will be less valuable if

inflation is high. Over the past several years, one catalyst that seems to be working in the opposite direction of

MBS prices is the Nasdaq and broader stock market.

As bond prices rise, interest rates fall. As bond prices fall, interest rates rise. The charts accompanying this

article show the Nasdaq Composite Index and the Fannie Mae 6.5% mortgage bond tend to follow paths that

are almost mirror images of each other. The consistency of this behavior is astounding.

As the Nasdaq moves higher, bond prices move lower causing interest rates to rise. As the Nasdaq declines,

mortgage bonds benefit, causing mortgage rates to fall. Additionally, and unlike common opinion, Fed rate cuts

have had virtually no direct effect on mortgage rates. Moreover, it appears that since Fed rate cuts act to

stimulate the Nasdaq, they have a negative effect on mortgage rates.

 We hope you found this post helpful, or at least a quick study on how the various instruments effect a new home interest rate or an existing one if it is a variable rate mortgage.

To find additional Salt Lake home mortgage information, visit our website @ Salt lake homes for sale.

To talk about Utah Real Estate, call us at 801-567-0946. We love to talk about the home buying and selling process as well as why the Fed rate cuts are not home mortgage reductions.

Filed under: Mortgages, Salt Lake mortgage Information