Interest Rates vs Mortgage Rates | PV Brokers Residential Real Estate
Over the past 2 years, the Federal Reserve has lowered short-term interest rates to nearly zero by a total of 3.50 percentage points. (This lowered the federal funds rate, NOT the prime lending rate, though that falls in lockstep with the former.) The Fed stated that it plans to have rates remain low and for a “considerable period of time”. Perhaps through 2013!! Many people are excited because they believe this will lead to lower rates on fixed-term mortgages, meaning the average person may be able to save big bucks by refinancing.The Fed has been on hold for quite a while now. Many would like to know if this means it may be a good time to consider refinancing their primary residence. Most homeowners are currently locked at considerable higher rates . Our research suggests something surprising. Contrary to popular belief, the federal funds rate does not directly affect mortgage rates. (Not even adjustable rates, from what I can tell.) According to Bankrate: Mortgage rates have declined dramatically over the past 2 years. But the Federal Reserve’s present stance on unchanged interest rates does not guarantee that rates will stay low. In fact, mortgage rates often climb following a cut in the federal funds rate, and actually rose about 50 basis points after the Federal Reserve announced its emergency 75-basis-point cut Jan. 22. Similarly, it is possible for Mortgage rates to rise while the Fed funds rate stays the same. So, we suggest that buyers and homeowners consider that just because the fed may be on hold through 2013, it does not mean that mortgage rates cannot climb.
That chart may be a little difficult to read. This one from Bankrate is not:
The blue line represents the U.S. national average on 30-year fixed mortgages. The green line represents the federal funds rate. . Both lines trend downward, but otherwise seem unrelated. If anything, the mortgage rate appears to be a precursor to the federal funds rate. Again, it seems clear that the federal funds rate does not directly affect mortgage rates.So, then, what does affect mortgage rates? According to an HSH Associates article on the subject, the answer is very complex. “Fixed mortgage rates, like other bonds, track US Treasury bonds quite well,” the authors write. However, they’re quick to add, “There is no specific ‘lockstep’ relationship between Treasuries of any term and fixed mortgage rates.” GRS reader Jericho Hill is an actual economist. When I asked for his comments, he noted, “Thirty-year rates are largely affected by the supply and demand of funds available for long-term loans, and by the anticipated inflation rate. If the Fed’s moves lead to expectations of higher inflation, guess what that would do? Raise mortgage rates!” Now may or may not be a good time to refinance your home. But don’t count on a drop in the federal funds rate to yield a corresponding drop in mortgage interest rates. Also, don’t wait too long as a rise in mortgage rates could still occur regardless of a Feds Fund rate increase.
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