Due to the HIGH VOLUME of phone calls I received the past week or so, I thought this topic was worth revisiting! I am getting a call at least every hour asking me, " I heard rates went down, what does this mean for my loan?" This is a very challenging question, because it really depends on SO many things! I will save those for another blog, but for today, here is a very brief, READERS DIGEST CONDENSED VERSION of WHY mortgage rates don't get better right away when the FED announces interest rate drops!
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.
As bond prices rise, interest rates fall. As bond prices fall, interest rates rise.
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. The bottom line is that it appears mortgage rates will get better if the NASDAQ sells off, and will get worse if the NASDAQ rallies.
Predicting the future is tough, so nothing is written in stone. Keep an eye on the NASDAQ, and keep in mind that the best rates may be behind us. However, mortgage rates are still really low and could have some quick dips so make the most of them while they last.
All in all, if you are working with a quality lender, and/or business partner, they will assist you in answering some of your questions, but sadly not all! I think all of us in the lending business would agree that our "crystal ball" is broken, and no longer functioning! My best advice to everyone reading this is that Rates today are FANTASTIC! Don't hold out for a .25 better rate! You could lose the good one that you have! Go through a Mortgage Lender,broker, or someone who has mutliple channels for your financing! You have more leverage, and if rates go down, you still have options that don't cost you any money!
Feel free to email me any comments, or call me any time! Most of this article was grabbed off the web and came straight from Fannie Mae! Thanks so much & Merry Xmas!
Darin
One Source Mortgage, LLC 608-592-2227
or catch me on the cell at 608-438-4922
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