since the fed is on a rate cutting binge, many mortgage applicants have been calling their mortgage representative and expecting a lower interest rate. In fact, many mortgage brokers advertise when the fed cut rates expecting consumers reaction to think that this means mortgage rates are following suit. Others waiting to refinance are puzzled why mortgage rates have not moved lower in the recent rate cuts.

This can be difficult for consumers to understand after watching a 2 1/4 reduction by the fed and seeing very little benefit with mortgage rates. So the question becomes, is a fed rate cut good news for mortgages?

The facts may surprise you. The fed only controls the discount rate and the fed funds rate. This is very different from mortgage rates. A mortgage rate can be in effect for 30 years when the rates set by the fed can really change from day to day. There really isn’t any real relationship between the fed rate and mortgage rate.

In 2001, the fed cut the rates 11 times which resulted in 4.75% reduction in short term interest rates. That took the fed funds rate from 6% down to 1.75%. Mortgage rates actually moved higher during this time. Why, because inflation, the arch enemy of bonds, actually rose.

You’ll notice longer term interest rates, like those on a fixed 30 year home loan, always tend to be higher than short term rates. This is due to the inflation premiums and liquidity factors connected to longer term securities. The trends show that when the fed cuts rates, the impact on mortgage bonds interest rate moves in the opposite direction.

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This entry was posted on Monday, May 26th, 2008 at 2:18 am and is filed under Loan & Rate Comparisons. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.