Will The Fed Decision Influence Mortgage Rates?

Those people who expect a break on interest rates for their mortgage loans because of the Fed’s recent decision have another thing coming. Market experts have indicated that just because the Federal Reserve Board has cut down interest rates doesn’t mean that mortgage rates will see the same decline. It may, however, be a sign that rates are going to drop over time.

The Federal Reserve Board recently announced their decision to make a radical change to interest rates. By cutting national rates by a half of a percentage point, they are making a commitment to the market. Experts warn that this may cause false hope within the real estate market. Mortgage loans don’t exactly work that way, though. They operate on a completely different standard.

It is true that the Fed took mortgage rates and the real estate condition into their decision, though. Interest rates on mortgage loans are often a prime anticipator. They don’t move in response to the Fed’s decision, they move beforehand in anticipation of any changes.

Contrary to popular belief, there is no direct link or relationship between mortgage loans and the interest rates put out by the Federal Reserve Board. There are many other contributing factors in the economy that have a bigger effect on the interest rate that one might get on mortgage loans. On thirty-year fixed mortgage loans, for example, a move in the interest rates would most likely come as a result of a change in the Treasury’s rate on ten year notes. Adjustable rate mortgage loans are more volatile, and they usually move based upon the LIBOR, or London Interbank Offered Rate. This little known fact would probably do much to temper some of the enthusiasm about the recent decision.

In recent months, the market has seen a significant interest rate down tick in 30 year mortgage loans. In the middle of the summer, the market was at a very high level, with rates being somewhere in the 6.75 percent range. Since then, things have leveled off to an extent. As of a couple of weeks ago, the rate for 30-year mortgage loans was at just over 6.30 percent. This is a good sign for those people with adjustable rate mortgage loans who are looking to switch over to fixed rate mortgage loans in the near future.

Though market analysts warn against widespread enthusiasm, there is reason to believe that the real estate market could be shifting to accommodate the home buyer. Adjustable rate mortgage loans, which are sometimes tied to the one year treasury, have seen a decline in their rates. That is much different from those loans which are based upon LIBOR, which have seen no drop in interest rates.

If you are a person whose mortgage loans include a home equity credit line, then there is reason for some happiness. Those are the only borrowers that will see an immediate drop in rates as a result of the Fed’s decision. This rate, which is sometimes based on the prime interest rate, has a tendency to move along with the Fed interest rate.

What does this mean for borrowers on the long term? Ultimately, it may be extremely important in convincing banks to finally reach out and lend to more people. Because the market has been so tight lately with foreclosures, there has been very little wiggle room for borrowers. The Fed cuts have made the cost of lender funds much less expensive, so they will be more likely to extend more credit in the very near future. This is an indication that the long term ramifications of the Fed decision are more important than any short term consequences.

If you are falling behind with payments or are having trouble securing financing because of poor credit, then this does not appear to be any sort of a solution. Many people are hoping that this will help with their mortgage loans by lifting the burden, but they are entertaining a pipe dream. As is usually the case with the Federal Reserve Board, their decision is not knee-jerk and won’t radically cause any change in the very near future.

What it does is make mortgage loans more attractive for those people who are doing the lending. Banks are the entities at the center of the mortgage loan debate, so they have just as much invested in any Fed decision as any of the borrowers out there. Over the long haul, banks and other lenders should feel more comfortable sending out their money to different lenders. Though they will undoubtedly be less than inclined to begin lending to sub prime borrowers this time around, interest rates for those people with good credit will see a drop. With houses costing more and more in today’s real estate market, this is just what the doctor ordered for responsible home buyers.