What is happening with loans in the market?

As you may have heard, the Federal Reserve cut their key lending rates by ½%. This was done in conjunction with other world banks in an effort to bolster the world economy. The Fed cut their Funds Rate from 2.0 to 1.5 percent. They also cut their Discount Rate from 2.25% to 1.75%.

What does this mean for you?
The Funds Rate is the rate which affects short term borrowing – like credit card rates, home equity line rates, the Prime rate. These are short-term variable rates. The Discount Rate is the rate which banks borrow money from the Fed on an overnight basis to meet their cash reserve requirements. The Federal Reserve hopes that by lowering both of these rates, spending and consumer confidence will increase and lend strength to the economy.

So will mortgage rates change?
Here is a simple summary: Mortgage rates are long-term rates. They are not directly influenced by the Fed changing their short-term rates like they did last night. They are tied to the trading of mortgage-backed securities. Demand for those types of securities is lower right now due to the persistent weakness in the mortgage sector. Lower demand for these securities doesn’t help long-term rates go lower. For example, mortgage-backed securities (FNMA’s and GNMA’s) are trading about 11/32 worse this morning than yesterday (as of 8:10 this morning). What that means is that you would pay between ¼ and 3/8 points more today to get the same rate as yesterday. For example, on a $200,000 loan, you might pay $400-600 more in one-time fees (“points”) at closing for whatever rate you locked today, vs. if you locked yesterday.

What does the future hold?
Concerns about the mortgage market continue to minimize downward pressure on interest rates. My opinion: if you have a property picked out and loan in process right now and you are locked in, you are in a good position; that’s where I would be. If you are shopping for a home, as soon as you have an offer accepted on one, let’s talk about locking in. Rates don’t seem to be shooting up, but they aren’t going down either. That could obviously change. I’m not an expert but my feeling is that until some stability is restored, we may see continued weakening in the stock market and a lack of downward pressure on rates. If something changes and rates go lower, then we will take advantage of that wherever possible.