If you’ve been following the news you’ve undoubtedly heard that the President signed the $700 billion dollar bailout package. Shortly after this the Federal Reserve cut interest rates. What you may not know is that the when the Federal Reserve cuts rates it lowers the Federal Funds rate which actually has nothing to do with mortgage rates.
When you hear about rate cuts in the news or see all of the bad news coming out of Wall Street you might wonder how exactly this impacts mortgage rates. The rate that the government is cutting is the Federal Funds rate and is what the government charges your bank to borrow money. This affects the rates on your credit cards, car loans, and lines of credit as the rate cuts impact the bank’s prime lending rate.
Mortgage rates actually follow the bond markets. This means that mortgage rates rise and fall based on the yields of long term bonds like the 10 year Treasury note. While this isn’t a 100% rule, it is the closest way of tracking the market’s affect on mortgage rates. Suppose for example you look at a 10 year bond and a traditional 30 year mortgage. If you are a investor with loads of cash to invest you can purchase ten year treasury bonds with their safe but low yield, or invest in mortgage securities which are now backed by the government and offer a better return on your investment.
What has all this got to do with mortgage rates? For 30 year interest rates to drop the yield on the 10 year Treasury bond needs to drop. If you’re refinancing your home and want to know which direction mortgage rates are going, pay no attention to the Federal Reserve rate cuts, but pay attention to what’s happening in the bond market. When the yield on the 10 year Treasury drops, expect to see a similar drop in mortgage rates.
What About The Credit Crisis?
It’s no secret that the financial markets in the United States are in trouble. Mortgage applications are at very low levels as people are holding their breath waiting to see what happens. Mortgage rates are currently just over 6% and there are opportunities to save money especially if you are carrying a first and second mortgage with higher rates.
Savvy shopping is a must and finding the right person to arrange your loan can save you thousands of dollars. Remember that mortgage companies and brokers are in the business to earn a commission. The loan that brings them the highest commission is probably not going to be the best one for your situation. You can learn more about refinancing with the right loan while avoiding interest rate markup and junk fees by registering for the free videos on this website.