The Fed cut the fed funds rate at the end of October. The rate was dropped from 1.5% to 1%. This is the lowest the rate has been since 2003. Following the cut we saw drops in all the major mortgage products. The 30 year dropped from 6.46 to 6.2. The largest drop was in the 15 year mortgage which fell from 6.19 to 5.88 a drop of .31 points. 5 year arms and 1 years also fell .17 and .13 respectively. Below are mortgage rates for the last several weeks.
November 6, 2008
30-yr 6.20 15-yr 5.88 5-yr ARM 6.19 1-yr ARM 5.25
October 30, 2008
30-yr 6.46 15-yr 6.19 5-yr ARM 6.36 1-yr ARM 5.38
October 23, 2008
30-yr 6.04 15-yr 5.72 5-yr ARM 6.06 1-yr ARM 5.23
October 16, 2008
30-yr 6.46 15-yr 6.14 5-yr ARM 6.14 1-yr ARM 5.16
As we can see from the numbers rates have been moving back and forth over the last few weeks pushed around by different bits of economic news coming out. And this week of course by the recent cuts by the fed. Let's look at what a mortgage would be this week on a 200k loan based on current rates. We also looked at what the mortgage would be for a 200k loan based on last weeks rates.
November 6th
30-yr $1224.92
15-yr $1674.77
5-yr ARM $1223.64
1-yr ARM $1104.40
October 30th
30-yr 1258.87
15-yr 1708.31
5-yr ARM 1245.77
1-yr ARM 1120.56
So first off my advice would be to avoid the 5 year arm. Since the mortgage is so close to what you would be paying on a 30 year fixed mortgage their is almost no reason to consider a 5 year arm. I would also probably avoid a 1 year arm. With mortgage rates acting so wildly its pretty likely rates could be much higher a year from now. If you get a 30 year fixed and rates drop substantially you can also refinance at the new lower rate. If you get a 1 year arm and rates increase there is not much you can do but simply make higher payments.
So what is going to happen moving forward. I have heard some speculation that rates are going to increase this month. I don't know if rates will be higher a month from now but I think rates will continue to see the atypical large weekly fluctuations we have seen the last few weeks.
There has also been some speculation that the fed will raise rates if the market starts to improve. I don't think this is a foregone conclusion. If the economy starts to improve I don't think the government will move quickly to raise rates. Basically the financial crisis has been so severe that if we start to move beyond it politicians will be worried of raising rates too quickly will botch a potential recovery. Or if the recovery fails for other reasons they will be blamed anyway. Therefore I think priority number 1 over the next year will remain the real estate and mortgage markets and that translates to keeping the fed rate low. Of course keeping the fed rate low does not guarantee that mortgage rates will stay low.
Ki is a realtor in Austin Texas. He writes regularly about mortgage interest rates. His site offers free mortgage calculator html for webmasters and a widget that shows current mortgage rates
New Home Hunters of Fort Worth and Tarrant County - Fort Worth, TX
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Ki: This is good news. Now, all we need to do is somehow get the Consumer Confidence level up to where buyers feel it makes sense for them to buy now. Hopefully with Obama in... the steps he takes will take us in a direction that inspires that confidence.
Nov 09, 2008 07:20 PM
NMLS ID: 40831 - Federal Way, WA
Ki,
While in this sample of rates over time, mortgage rates fell after a cut in the Fed Funds Rate, that is not typical. Mortgage rates have very little in common with the Fed Rate. Mortgage rates are a product of a combination of Mortgage Bonds (such as the FNMA 5.5%, or the GNMA 6.0%, etc), and the spread between them and Treasury Notes.
Mortgage rates are simply a number derived by banks to produce an adequate return on investment. The Fed Funds rate is the overnight rate at which certain banks (large ones) borrow directly from their local Federal Reserve Bank.
I would recommend caution before putting too much emphasis on the relationship above. I can show you a multitude of examples over the years where a reduction of the Fed Rate has led to a significant increase in mortgage rates. This typically happens because of inflationary concerns. When the Fed lowers the cost of money (IE its rate) it has an inflationary effect, and no one wants to be repaid over a long period such as 30 years with inflated Dollars. The reason this did not happen in the latest instance of a Fed cut is because, for the first time in history, nearly all of the world's Central Banks dropped their rate at the same time, thereby negating the inflationary effect on any given currency.
Ron Brown
FHA & VA Loan Specialist
First Mortgage Company of Washington
Nov 10, 2008 12:16 PM
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