With frequent talk of cutting the Fed Funds Rate (FFR) going forward, I figure it’s a pretty good time to discuss the effects of a Fed Cut and the translation into mortgage rates.  Often, this is a very misunderstood subject, and rightfully so.  There just isn’t enough good information out there – period.  The media, economists and CNBC anchors get this wrong.   Let me try to set the record straight.

 First off – the Fed Funds Rate (FFR) does NOT directly effect mortgage rates.  The FFR is a overnight rate to borrow money (now 30 days, but that’s another story).  Therefore, the FFR is not a good indicator at all to follow when trying to predict mortgage rates.

Now that we know what the FFR is not, let’s talk about what the FFR does affect:

• Credit card rates.
• Home equity lines of credit (HELOC’s).
• Borrowing rates for banks that fund loans (for their short term funds).

Now, with this said – it’s fair to say that history has a way of repeating itself, right?  Well, take a look at the most recent 5 meetings and the effect on mortgage rates that those cut’s had.

It’s important to note that the lower value of a mortgage backed security (MBS), the higher the interest rate you’ll see on your mortgage.  So, lower values on mortgage backed securities translate into higher mortgage rates.  Make sense?  Now for the history:

Now, after yesterday and the stock market sell-off, we made some of our losses back in the bond market.  However, there is still a lot of talk about future fed cuts. 

So, you tell me – if you’re considering financing a home in the next couple months, look at our recent history, do you want to hang out and see if rates get lower?  I know I just closed on my personal refinance, the balls in your court.  I’m rooting for ya!

If you’ve got questions please shoot me an e-mail at tyler@iowamtg.com or use the form off to the right and i’ll help you navigate the storm and get your mortgage under management where it deserves to be!