Real Estate Insights

Firstly, the Federal Funds rate is a short term interest rate that may be defined as rate at which private banks may lend their balances, or federal funds (remmber FDIC), held by the Federal Reserve to other depository institutions overnight. This interest rate is purely “short term” and will not affect “long term” interest rates immediately.

So, the change to the Fed Funds rate is a change in short term interest rates and will first affect those rates that are offered on short term securities such as corporate bonds, short term treasury notes, and other interest rates such as the Prime Rate. This is why we saw the stock market rally yesterday on Tuesday because the cost for corporations borrowing over short time periods decreased thereby helping many companies.

How will this affect mortgage rates? Most home mortgage interest rates are considered “long term” rates as they may offer a fixed rate up to 30 or even 40 years.  And long term interest rates are affected most by economic growth and inflationary pressures. Most economist agree that the current economy is still at risk to higher than normal levels of inflation, so long term rates, such as those offered on long term bonds and 30 year mortgages may actually still climb higher rather than dropping.

But those mortgages that are based on short term interest, such as home equity lines of credit and other adjustable rate mortgages (short term fixed rate mortgages) will be affected. One such interest rate that will change immediately is the Prime Rate, although not directly related to the Federal Funds Rate, it is directly correlated and will most likely mirror similar, if not the same, changes.  Keep your eyes on your Home Equity Lines of Credit or any other loan you might have, as some interest rates offered on credit cards and even business loans are also tied to the Prime Rate, and you may notice that your interest has gone down.  

Also, if you currently have a monthly adjustable rate mortgage such as a “Pay Option ARM” or a similar program whose interest rate is based on the rates offered on US Treasuries, then you can expect relief as these rates will gradually begin to come down.

Keep in mind that Interest rates for conforming loans -- those of no more than $417,000 -- are already reasonably low, averaging 6.31 percent for a 30-year fixed-rate loan, and may not be affected any further. But there's an important class of loans that will hopefully benefit from the big cut: the high-ticket home mortgages known as non-conforming or jumbo loans. These loans have no guaranteed secondary market because they exceed the $417,000 cap, and Freddie Mac and Fannie Mae will not buy them. So if the secondary market for jumbo loans can recover from this year’s earlier deboggle with some help from the Feds, then we may see some much anticipated interest rate relief.

**Remember, if you have a short term fixed rate and the fixed period is ending, the interest rate on your mortgage will then be calculated by adding the margin, or the fixed portion to the index value, the adjustable portion. So the new interest rate that you can expect to pay will be the sum of the margin and the index. All the indices used in mortgage products will be proportionally affected by changes made by the Fed. The details of your loan can be found in the mortgage note section of your closing documents. If anyone needs assistance finding this information please do not hesitate to contact me. And if you refinanced last with us, we keep copies of your mortgage documents in our records for your convenience.