Why do Mortgage Rates go up when Fed cuts the Rate?

Services for Real Estate Pros

When Fed cuts the rates my office is swamped with borrowers who are calling to see if they can get a better rate.  Many of them are surprised that Mortgage Rates went up instead of down.  Luckily, I always lock rates as soon as I can. To me as a mortgage professional, predicting the direction of the rates is not a game. Most mortgage professionals are not bond analysts. More importantly, I've been in the business long enough to see rates go up 6 times in 1 day by a total of 1.5%. 

                                        Let me shed some light on this subject:      

The reason why mortgage rates go up when Fed cuts the rates is pretty simple. There is absolutely NO relationship between rates controlled by Federal Reserve and mortgage rates.  Only  very inderect relationship.

The Federal Reserve controls the rates they charge banks to borrow money and the rates banks charge when loaning money to each other for very short terms. These rates sometimes directly have an effect on credit card rates and Home Equity lines of credit. However, these rates have no effect on regular 30 Year Loans or FHA loans.  Fed rates are linked to short term bond. However, mortgage rates are linked to longer term bonds. The most popular index is 10 Year Treasury bond. You can actually go on internet and trace that index using any financial websites. 

Mortgage rates are somewhat lagging behind Fed rates and might eventually get lower. However, that could take a while. Immediate impact is almost always the increase of mortgage rates when Fed cuts the rate. Later on the rates usually return to where they were and might eventually fall.

So there you have it.



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Comments (2)

Anthony Dashtizadeh
Garcia Realty Group, Luxury Sales Group - Potomac, MD
great explaination. for a little comedy... I have tried explaining that to a client I had whom happenedd to be a finance professor, he did not get it. Let me know if you try that to the average client.
Jun 06, 2008 07:16 AM
Dennis Sanchez
Coldwell Banker Tenafly - Hackensack, NJ

thanks for the info, but I guess that the lowering of the interest rates of mortgages is a longer process.

Jun 06, 2008 08:28 AM