A lot of people believe that mortgage rates will automatically drop when the Fed cuts interest rates when, in reality, it can sometimes be the opposite. When you hear about the fed cutting rates, the headline is referring to the Federal Funds Rate, which is the overnight lending rate that the Federal Reserve uses with other banks.
The markets get excited when news comes out that rates are going to be lowered because that means short-term borrowing gets more affordable, leading to increased economic activity for businesses everywhere.
If you are a homeowner with a 15- or 30-year fixed mortgage, however, you shouldn’t be so sure that the lower rate will mean a great opportunity to refinance for you.
When the short-terms rates are lower, the bonds market tends to think that higher long-term rates are going to come around sometime soon. Homeowners have been surprised by this before, closing on a home when rates have been lowered only to find their loans have moved up. Likewise, when rates drop, worries about inflation have been known to increase mortgage rates. When food and oil prices rise, the Fed is only willing to lower rates to avoid recession.
When it seems like inflation is going to rise, treasuries tend to sell off, pushing yield higher and taking mortgage rates along for the ride
If you are a homeowner with an Adjustable Rate Mortgage loan that adjusts in the short term, a rate cut could be useful. It makes it less likely that your rate is going to skyrocket. The long-term, fixed-rate holders are the ones who need to keep an eye on economic indicators. Think about the sub-prime crisis and how that made it difficult to get a loan. During that time, the housing market softened in much of the country and rates dropped significantly.
I wish you the best of luck in shopping around for a mortgage. If you have any questions related to mortgages or anything else about your personal finances, don’t hesitate to contact me today and let me know how I can help you.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Pence Wealth Management and LPL Financial do not provide mortgage services.