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September 25, 2007
Opinions/info on whether fed rate cuts bring down mortgage rates?
I want to lock in a home equity line of credit and my mortgage brokers says I should wait because feds will cut rates again before end of year and by Jan we should be back in the high 6s. But yesterday someone (I think The What) said that feds cutting short term lending rates won't effect mortgage rates. As far as I understand (which isn't very far) this contradicts everything I've read and the feds intentions in cutting the rates. Does anyone have any understanding of what the relationship is likely to be btw fed short term rate cuts and mortgage rates?
Comments
The Federal Reserve has the (very strong) ability to influence short term interest rates, but it does not even set them per se (except the rates at which banks can borrow from Fed itself). It has a target for short term interest rates that it seeks to achieve by adding or withdrawing cash to the money supply in order to push short term rates up or down. Fed announcements serve to notify the markets that the target has changed and are a relatively recent invention. Long term rates of 10 years and more (and really anything above 3 months) are set by the market. What has happened recently (i.e. the past three or four years) is that while the Fed has (effectively) raised its target for short term rates, long term rates haven't moved (or moved nearly as much). Why? There are lots of theories, with one of the most compelling being that foreign governments like China and Japan keep buying US Treasury bonds because they have the highest yield of all "no risk" investments. This is a classic case of the Fed "pushing on a string" -- short term rates have risen, but long term rates stayed the same. Additional rate cuts by the Fed may or may not cause mortgage rates to decline. Another rate cut could serve to actually increase mortgage rates, if the market believes they will lead to an acceleration of inflation and thus demands more return for longer term loans.
Posted by: guest at September 25, 2007 3:06 PM
There is really no reason to lock in a rate for most home equity lines of credit right now. Rates for mortgages have a relationship to the interest rates set by the Fed, but are not strictly pegged to them.
Most home equity lines, however (as opposed to mortgages) generally are directly pegged to the prime rate, which in turn is determined by the fed funds rate. So if the funds rate gets cut by the fed by half a point (as they were last week) your home equity lines' rate probably went down a half a point as well, or is about to.
Obviously, you should check the terms of your line of credit, but in general, interest rates are only going to go down or stay flat in the nearterm. They will not go up anytime soon. And when they do, you will have ample notice.
Mortgage rates could conceivably go up, because they have a life of their own, but if youve got a variable rate home equity line based on the prime rate, theres no reason to lock it in now as it is likely strictly pegged to the prime rate.
Posted by: Bonkers at September 25, 2007 3:27 PM
OP - thank you both for your informative responses. they help a lot!
Posted by: guest at September 25, 2007 4:08 PM
Deterioration of mortgage quality (read increase in delinquencies) has widened the spread or premium that banks charge compared to their funding rate. This is compounded by the steepening of the yield curve which is the spread between short and long term rates due to inflation expectations. Both of these factors have combined to result in higher mortgage rates. Two more cuts in the target fed funds rate will result in lower short term rates but may or may not result in lower mortgage rates due to the shape of the yield curve and widening of spreads. The what is a mortgage broker and has a limited understanding of actual market dynamics, though he is entertaining. Good luck.
Posted by: guest at September 25, 2007 4:27 PM
mrtg rate is only going up from here due to inflationary pressure and weakening dollars. Some are even speculating Fed will have no choice but increase rate by early next year.
Posted by: guest at September 25, 2007 8:32 PM
Most of the market watchers are calling for an additional 50 to 75 basis point cut in the fed funds rate. Prime is usually set at fed funds plus 3% or so. So if the fed cuts an additional .75% over the next 3 fed meetings, prime could be down to 7% over the next 3-4 months. If you get a HELOC that floats with prime, then getting it now or in 3 months won't make much of a difference as the rate will adjust as the fed eases. If the fed doesn't ease, you pay more interest. I have not seen any rate calls for tightening (higher fed funds rate) for early 2008 like the 8:32 poster. The impact on mortgage rates is very different. Treasury curve has gotten steeper (rates are higher the further out you borrow) so that 30 year fixed rate could go higher. All the 2/28 teaser mortgages are gone because you can't repack them into sub-prime MBS any more. Fed moves have more of an impact on prime rates right now than 30 year fixed rate mortgages if that helps.
Posted by: guest at September 25, 2007 10:54 PM
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