The Federal Reserve is widely expected to cut its rate again later today, but that doesn’t mean you should call your mortgage broker this afternoon in search of a lower payment. You should have called yesterday.
There is a widespread misconception that mortgage rates are directly connected to the Fed’s funds rate. In fact, the relationship is more along the lines of “Me and My Shadow”: the two tend to move approximately in step with one another, but neither one orders the other around.
“Mortgage bond markets meet every day, much more often than the Fed,” says Dan Green, a mortgage planner and loan officer at Mobium Mortgage here in Chicago and the author of themortgagereports.com. “Most of what the Fed is responding to has already been priced into mortgage rates.”
Green notes that in the six weeks leading up to the emergency rate cut the Fed announced last week, mortgages were cheaper than they had been in three years. “But when the Fed made its surprise cut,” notes Green, “everybody suddenly took notice. By the time they called their loan officer, it was almost too late.” Bond money that might have backed up new mortgages rushed optimistically into the stock market because of the Fed’s announcement. As a result, “rates went up three times on Wednesday, and on Thursday they went up four more times,” says Ray Cohen, a mortgage broker at Chicago-based Revere Mortgage.
That’s not to say that mortgage rates will automatically go up after today’s expected rate cut. “What the Fed says is more important than what it does,” Green says. “If they say inflation is still a concern, you can expect mortgage rates will go up.”
One type of homeowner debt will change right in step with the Fed’s announcement: home equity loans, which “exploded in popularity in the past five years,” Cohen notes. Enormous numbers of homeowners have these loans, and many economists say much of the debt was used to fund a buying binge that kept the economy pumping in the last few years. When interest rates went up, the purchases that those loans had made came to look far more expensive after all.
Because the rate on a home equity loan is tied directly to the prime rate, their interest rate has already gone down about 1.75 percent this year. On a $100,000 home equity loan, that translates into a $140 reduction in the monthly payment, Cohen says. A reduction of another half-point by the Fed would cut that payment another $41. “That’s nice to have,” he says, “but it’s not ‘Oh my God, my life is saved’ money.”