You have probably heard that the Fed cut interest rates again. So what does this mean for Kansas City mortgage interest rates? Not much of anything really. Despite the Federal Reserve cutting the the Federal Funds Rate, mortgage rates have gone UP. But don't be shocked by this as it's not an uncommon event. In fact, yesterday was the first day in while that I had seen the average nationally 30-year interest rates actually drop. So why then do so many people get excited when the Fed adjusts interest rates? I blame the misconception on that Ray Vincent mortgage guy from the radio commercials. You know, the guy with the irritating voice who makes you change the channel before the commercial is over.
Here's what you really need to know. Mortgage rates do not go up or down just because the Fed adjusted the Federal Funds Rate. They are not tied together, so when mortgage lenders say "the Fed has dropped rates, come in today to refinance", what is really happening is that the lender is simply dropping the rates as a marketing ploy. There is nothing wrong with this, but it's not because the Fed dropped rates. It's because the lender wants to do more business and may be willing to make less on a given loan at that time - not because they are passing on a reduced interest rate to you. A large portion of the money many lenders make when doing a loan is the amount made by selling the loan on to the secondary mortgage market. They may say today they are charging less because rates have dropped but in reality they are just offering a lower interest to generate business, but almost assuredly making less on the loan when they sell it off to the secondary market (unless rates coincidentally DID drop as well).
You shouldn't even be surprised to see mortgage rates go UP when the Fed reduces the Federal Funds rate. Remember, one does not effect the other and studies have shown that mortgage interest rates are almost as likely to go up as they are to go down after a Federal rate adjustment. Don't believe it? The latest example is earlier this year when the Fed rates DROPPED 0.75% but within a week mortgage rates had INCREASED 0.5%. Here's a graph courtesy of Bankrate.com that shows you that Fed rates and mortgage rate changes have little if any direct correlation. You'll see many instances where the green line (interest rates) dropped but the blue line (Federal Funds Rate)trends upwards, etc...
As quoted on www.BankRate.com, "The green line represents the federal funds rate. The blue line represents the U.S. national average on 30-year fixed mortgages. Both lines trend downward, but otherwise seem unrelated. If anything, the mortgage rate appears to be a precursor to the federal funds rate. Again, it seems clear that the federal funds rate does not directly affect mortgage rates." |
So what then can be used when trying to foresee mortgage interest rates? A popular answer is investor speculation on inflation. If investors anticipate rising inflation then interest rates trend upwards. If investors expect decreased inflation then mortgage rates are likely to drop. Historically the 10 Year Treasury Bond has mimicked mortgage rates so that is where I'd recommend you put your attention. Forget about the Federal Funds Rate and those irritating commercials that follow within days. If the deal is a great one jump on it, but understand that it's really not being offered because the Fed just dropped interest rates.