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Monday, July 29, 2013

How The Federal Reserve Impacts Your Mortgage Rates

If you have heard on the news more than once that interest rates are going down due to the Fed, then you might be wondering what this means. The "Fed" is the Federal Reserve, and it affects the mortgage rates homeowners pay, but probably not in the way most homeowners think it does. Unfortunately, and more often than not, the most confusion over the Federal Reserve is caused by weak reporting by the media. When this happens, mortgage rates can move in a direction other than what homeowners may have expected.

What Happens When the Federal Reserve Cuts Rates
Financially-speaking, when the Fed gets involved in rate cutting, these cuts usually occur with the Fed Funds rate. This is the rate at which banks lend money to each other. When the Fed Funds rate drops, so does the Prime Rate. This  means that those customers who already receive the best rates will be entitled to receive even better rates when Fed cuts occur.

But these declining rates aren't only for the banks' best customers; those who have taken out short-term loans can also benefit. So if you've taken out a home equity line of credit or even a credit card, you can take advantage of lower rates when the Fed makes its cuts. Unfortunately, this is a double-edged sword, because while rates for things like mortgages may take a dive, any money that you may have in a savings account will accrue less interest.

Why the Federal Reserve Engages In Rate Cut Activity, and Why This Doesn't Affect Mortgages
The real estate market can better thrive on a healthy economy. But sometimes it needs a little bit of stimulation. That's where the rate cuts come in. But contrary to popular belief, the cutting of rates on the Federal Reserve level does not help mortgage rates directly. Instead, it affects the Overnight Lending Rate, Fed Funds Rate and those interest rate maturities which are considered short-term.

The reason a Fed cut on interest rates doesn't mean that mortgage interest rates will drop basically comes down to the stock market. Mortgage-backed securities, or rather the trading of these securities are what dictate the rate you pay on your mortgage. And because they are traded on a daily basis, the rate can fluctuate several times in a trading day.

When You Should Lock In Your Interest Rate
One scenario that can cause a homeowner to be in limbo is whether or not to lock in their loan prior to the cutting of rates on a Federal level. Many may be tempted to wait before making the decision to lock in their loan because they want to wait before the Fed cuts their rates. But in reality, this is a big mistake because should the Fed drop their rates by a large number of basis points, it can cause long-term rates like the 30-year fixed to suffer a spike, albeit a short-term one.

The best way to handle a Fed cut, say the experts, is to lock before the actual cut, as over time, long-term fixed rates will level out once again. And so a homeowner who will be closing in three weeks or less can best protect the original and best rate by locking it in before the Fed makes their move.

Finding the Loan Company That Looks At the Right Indicators
The goal for any homeowner looking to get the best rates on their loan is to go with a company who has their eye on the right mortgage rate indicators. But even this can be a roll of the dice. This is why it's important for homeowner to have a particular target rate in mind. Because while a homeowner can get lucky by locking in at the same instance rates dive, this is not a common or regular occurrence, and so should not be thought of as such.

Sticking to your goals and keeping your big financial picture in mind is the best way to ensure that you get the rates you want at least most of the time.
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Guest author Tony Donovan writes on a variety of topics related to the mortgage industry.  He recommends consumers consult a home mortgage calculator when trying to determine whether they can afford a mortgage, or if a refinance would be beneficial.

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