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Home Loan Rates and the Fed Funds Rate
How are home loan rates determined? A common question I have heard from my clients over the last few months is if a drop in the Fed rate will lower the home loan interest rates. The short answer is no. In my experience, home loan rates actually tend to fall prior to a Fed rate cut and rise after it is announced. That leaves the question of exactly what affects the interest rates on consumer home loans. The answer is no where near straight forward.
The Home Loan Process When we start to look at loan rates, we need to understand the flow of money in the residential loan process. When you apply for a loan the mortgage broker shops around and finds a primary lender that has a program and rates that fit your needs. That primary lender processes your loan and pays the seller for the home you are purchasing.
The primary lender can either hold your loan and collect the interest you pay, or they can sell your loan to the secondary market which is what commonly happens. The primary purchaser of home loans in the United States is Fannie Mae. They purchase loans with particular requirements from ... more
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