Correlation between FED Funds Rate and Mortgage rates
Posted by cmcgroup on January 25, 2008
Here’s a “contrarian view” on the correlation between the FED Funds Rate and mortgage rates from Pat Kitano of TransparentRE blog.
Pat is expressing a common sense view of what should be happening in the long term mortgage markets with the FED lowering short term rates. I’ll be discussing that topic in tomorrow’s PowerPoint post, but I had to get this link to Pat’s blog post posted here today as it relates to questions many people are asking.
The Discount Rate is the interest rate that banks pay to borrow money directly from the Fed. The FED Funds Rate is the interest rate that banks pay when they borrow money from each other in the US. The 1 month LIBOR Rate, the London InterBank Offered Rate, is the interest rate that banks pay to borrow money from other banks for 1 month typically in the international wholesale money market in London. LIBOR is the base rate that is used on most adjustable rate mortgages (ARMs).The Prime Rate is the base rate that is used for most consumer loans such as credit cards and home equity lines of credit, as well as most small business loans. Prime and LIBOR are influenced by the FED Funds Rate, but LIBOR can differ based on how independent the European Central Bank views its lending risks over and above its knowledge of what the FED is doing.
For consumers in the US, your current payment on a variable interest rate loan will drop due to the FED move. That’s why you selected an adjustable rate loan in the first place. You benefit when the rates drop. Many people are looking at this opportunity of anticipated low interest rates to refinance a current loan, whether a fixed or adjustable rate loan. Rates on these loans are driven by the market for Mortgage Backed Securities that trade on the bond market. So shop around for the best mortgage products if you are refinancing. Loan brokers and bankers will tell you that all lenders get their funds from the same place or places, but a quick glance at the comparable rates of conforming and jumbo loans from different lenders over the past three days shows that rates can differ. (See charts below) Not all interest rates of all loan products will be the same. It pays to shop around or work with a loan broker that you trust to shop around for you. Refer to the Good Faith Estimate post on this blog several weeks ago for a strategy to be in control of your refinance process so you can make a refinance decision in which you are confident.
