Fed Cuts Mortgage Rates Again
January 22, 2008
The Fed Cuts Rates Again: What You Should Do Now?
Today, the Fed decided to cut the Federal funds rate a whopping 75 basis points to a scant 3.5 percent, the lowest its been since August 2005 (Source: federalreserve.gov). Although talks in the news and among policymakers have been centered around countering a potential recession, the unabashedly selfish (nonetheless, important) question for you may be “What does this mean for me?” Here’s a quick cheat sheet for managing your finances after the Fed’s decision:
• The effects of the Fed funds rate cut should be seen most noticeably in short-term adjustable rate mortgages (ARMs). While a drop in rates will be more evident over the next few months, those who will benefit most immediately will be those with ARMs whose introductory fixed rate period is ending. Because the rate adjustment period is beginning on these loans, the rate cut will be reflected in the newly assessed rate. However, those with ARMs who are in their introductory fixed rate period could potentially see the benefits of the lowered rates over time.
Savings
• Think about locking your money into a CD today before rates have an opportunity to adjust to the Fed rate cut. Because CDs flaunt fixed rates, this may be a smart move if you suspect rates will drop further. Due to the volatile stock market, be sure to choosing a savings product with an FDIC-insured institution to ensure that you never lose your initial deposit. Check online for the most competitive offers.
Pay close attention to promotional and teaser rates from various financial institutions. Regardless of the rate environment, banks almost always offer impressive rates on CDs, money market accounts, and high-yield savings products to attract new customers. Even if you have an institution you already enjoy banking with, do your research and check online for current promotions. Be sure to use the tools available to you to stay up-to-date with the most current rates being offered.
This should also stimulate the real estate market as mortgage rates reach historic all time lows. New home hunters now can afford more home for their money.
Checking rates regularly and staying informed of what rate changes mean for you can help you properly gauge what is best mortgage for your situation.
Source: Informa Research Services
First off the fed did not cut mortgage rates
the fed cut the fed funds rate which is the rate banks loan to each other
the discount rate was also cut which is the rate that banks loan from the treasury.
As Bret mentioned, the Fed does not control mortgage rates. The Fed funds rate cut is meant to spur the economy. Any correlation between mortgage rates and the fed funds rate is due to the fact that both are reacting to the economic environment.
When the economy needs to be stimulated, the Fed steps in and cuts the Fed funds rate. Similarly, as the economy weakens, the mortgage rates tend to drop. Mortgage rates are much more closely tied to the long term Treasury bills. The 10-year T-Bill is a decent indicator of where mortgage rates are going since that is basically a 10-year lending rate. It is at least a better than the Fed funds rate or even the discount rate.
Last week, following the 0.75% fed funds rate cut, mortgage rates actually increased slightly.
Thank you both for correcting the post and what the Fed really did do. We will inform the person that submitted the post. We really appreciate your comments. Feel free to contribute anytime.