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As expected, the FOMC (Federal Open Market Committee) often referred to as the FED, cut rates today. This is the first rate cut since June 2003. The rate cut was by 50 basis points – the analyst consensus was a 25 basis point cut. In addition and perhaps more important, the FED cut the Federal Discount Rate by 50 basis points. The discount rate is the rate charged by the Federal Reserve Bank to its eligible member banks and financial institutions.

The effect of an interest rate cut is often misunderstood. It is commonly thought that mortgage rates will edge lower when the FED reduces rates – however it often times has the opposite effect.

So why does this happen? A rate cut is already “built” into the market by the time the FED actually announces a rate cut. Mortgage Bonds trade based on the specific wording from the meeting about inflation concerns. Concerns over inflation will always have a negative affect on mortgage bonds.

The good news in the rate cut is that Home Equity Lines of Credit (HELOCs) will feel an immediate affect by a rate cut by the FED. The interest rate that HELOCs are tied to is what is referred to as the Prime Interest Rate. The Prime Rate is calculated by adding 3.00% to the Fed Funds Rate. So after the rate cut, Prime is now at 7.75%. Not all home equity is in the form of a line of credit so check with you lending institution to determine if you will get the benefit for the rate cut.

The immediate effect on Mortgage Bonds is positive - more than likely because the rate cut was greater than expected. As more details about the FED meeting are release I will update this posting.

Please feel free to call me if you would like to discuss the FOMC decision and its affect on you at 727-799-3331

I often have clients and business associates ask me about interest rates and what they are doing.  It is very difficult to give a generic answer to this question since every borrower’s situation is unique.  However, there are some constants that impact rates for all borrowers.  In this section of my BLOG, I will give a brief explanation of what affects interest rates and more important the how and "WHY" behind the change.

A popular misconception is that the 10 year Treasury note is how mortgage interest rates are determined.  Actually, mortgage interest rates are determined by FIXED RATE MORTGAGE-BACKED SECURITES (bonds) traded every day just like most other stocks and bonds.  These bonds are sold in 0.5% increments (example 5.50%, 6.00%, 6.50%) and are priced accordingly.  I will be happy to explain the relationship between price and rate if anyone is interested.  I personally follow the activity of these bonds every day and know when to secure the best possible interest rate in the short term.

Mortgage Bonds trade daily based on technical factors, but economic news can and often does have a big impact on interest rate changes.  There are numerous economic reports that occur on a monthly basis, some of which have a greater impact on mortgage bond pricing than others.  Examples of high impact indicators are: Consumer Price Index (CPI), Personal Consumption Expenditure (PCE), Employment Reports and Federal Open Market Committee (FOMC) meeting/minutes.  The items listed are only a representation and not meant to be an all inclusive list of indicators that could potentially affect rates.

So why do these items affect mortgage interest rates?  The bottom line is inflation and what the leading indicators “say” about inflation.  The FED (Federal Reserve) likes to see inflation in a range of 1% - 2% ~ inflation is currently at 2.69% down from a high of just over 4% a year ago.

If there is “bad” economic news it is usually “good” for mortgage interest rates and vise versa.  The reason for this is that “bad” news usually means inflationary pressure is reduced.  What I mean by “bad” is that the data released is lower than expectations.

I am going to end my discussion and open it up for your questions.  My goal is to create a more informed and educated consumer so you make better choices when it comes to your home financing.