Fed rate and mortgage rate there is a difference!

I had a great dialogue on Active Rain.com with another Real estate agent about the difference between The Fed Rates and the mortgage interest rate.
So the Fed cut the rate.

Difference between the fed rate and mortgage interest rates.

How does a ¾ of a percent drop in the Fed rate affect us? So many consumers think that the Fed Rate is the mortgage interest rate. It is not the same thing. It is one of the most misunderstood things in the mortgage industry. The ¾ of a percent drop in the Fed rate may or may not affect the mortgage interest rate. The Fed rate and the mortgage interest rate are two separate rates. If one goes down it does not mean the other goes down too!
The Fed rate you hear so much about if the Rate the Federal government gives on overnight loans from bank to bank. We as consumers do not get that rate. Mortgage interest rates are determined by market conditions. Some of the things that affect the mortgage interest rates are:
How well the bond markets is doing? especially the 10 year bond market
How well the stock market is doing
Are the housing starts down?
Are unemployment numbers down?
How is the economy?
Are the numbers that came out today high or lower than expected?

Generally speaking mortgage interest rates get better because the stock market is doing worse and people are investing more in the bond market. It is many times an inverse relationship. If the stock market is doing good then mortgage rates are doing bad. That is generally what happens. If unexpected bad news such as higher unemployment numbers, lower housing starts, bad economic news usually results in better interest rates. Inflation, great economic news makes interest rates to go up.
So the bottom line is that a ¾ of a percent drop in the Fed rate does not correlate to a ¾ of a percent in mortgage rate. In fact sometimes when the Fed drops its rate the mortgage rate may not change at all. I have even seen it go up on occasion. Eventually some of the Fed rate percentage drop does affect the mortgage interest rate.
Think of it this way people rush to buy "safer" investments like bonds when there is bad economic news. Investors are looking for the best rate of return. So if they think the stock market is not the best place to be. There is more money in the bond market and sometimes lower rates.
The above is a brief generalization of what happens with mortgage interest rates. It is a complex item. It could take a novel to truly explain everything that affects it and how it affects it in different market conditions.
So what you need to take away from this is that:
1) The fed rate is not the mortgage rate.
2) That the mortgage rate is determined by market conditions especially the bond market.
3) The mortgage rate changes daily reacting to market news and conditions
4) If we as "mortgage experts" could predict interest rates we would be rich just like we would be rich if we could predict the stock market.
There is a point that adjustable rate mortgages should come down, along with credit card rates and home equity loans. The point that I am making is that because the Fed lowered the rate 3/4% does not mean it is going to be a 3/4% of a rate drop in mortgage rates. Tuesdays mortgage rates did not change much. Some banks didn't change at all so changed a 1/8% of a percent. Not 3/4%
Mortgage interest rates almost never correlates or exactly match the fed rate drops. Like I said sometimes I have seen them go up the day the Fed lowers their rate. In fact that is the case this week. Rates are now higher on Friday than one Tuesday when the Fed rate was cut.


The Fed rate and the mortgage interest rate are not directly correlated. The fed rate is a just one of the many factors. It is not the most important by any means. It is more market conditions that influence mortgage interest rates. The price of 10 year bonds influence it more than anything.
Take example Wednesday. Mortgage Rates did drop this morning down 3/8% from Monday's rate. So just comparing the Fed drop to mortgage rate that was just 1/2 of the fed rate drop. But what is even more interesting is what happened this afternoon is that rates jumped back up because the Dow was up. Every bank repriced. I have gotten fifteen emails stating the rates changed. . So tomorrow morning mortgage interest rates may look like they never changed even though the Fed dropped their rate 3/4%
Today's low rates were there for about 4-5 hours!

Like I said, I have seen too many times when the rate was there for a few hours or for a day. I called the borrower to inform them and then they didn't make a decision the same day. And then the rates were gone. It is a tough thing to tell a borrower that they waited to long. I know people that were waiting for it to go lower in 2003 and ended up with a 5.875% rate instead of a 5.375% rate. They didn't make a decision quick enough. When you loan officer calls sometimes you have to make a quick decision. There are lots of loan officers that will tell you horror stories of people not wanting to lock a rate and then upset that they didn't.
During 2003 there were times when the Fed lower the rate and the mortgage rate actually went up. That is because sometimes the market has already figured in the Fed's drop and other market conditions outweighed it.
I hope this explains it a little better. If a consumer and real estate agent is more informed about the mortgage process the higher the comfort level they will have. Your home is your biggest investment. Hopefully the rates come back down a little for all the people that need to get out of their adjustable rates. We all want them to keep their homes and help stabilize our economy a little more.
For more mortgage and real estate information and to search Oakland County real estate, or Southeastern Michigan homes for sale go to my website www.russravary.com Have a great day! Russ Ravary