Fed interest rates & mortgage rates

During the Federal Reserves July 30-31 meeting, they may make a decision to lower interest rates. What does this mean for mortgage borrowers, such as those with adjustable rate loans? The borrowers with fixed rate mortgages and loans will not need to worry about an increase or missing out on a decrease since they will not be affected.

In this months Federal Open Market Committee meeting, most news outlets are predicting that Fed Chairman Jerome Powell will lower rates by 25 basis points from 2.25 to 2.0 percent. This will be the first time rates will be lowered in more than 10 years.

Federal funds rates do not directly affect long-term fixed -interest mortgage rates, which are linked to the yield of the U.S. Treasuries which the market determines. These days, mortgage rates are so low because the note is extremely popular to investors which has thus driven the price up and the yield down. There is a chance that if the Fed decided not to lower rates, the market may react by putting pressure on long-term interest rates from the market thinking that the Fed is not supporting growth by lowering interest rates, which would probably drive interest rates up and long-term rates down if the market thinks the Fed is not trying to support economic growth.

When the Fed lowers rates, the borrowers with variable rate loans end up being happy campers. These are folks with HELOCs (home equity lines of credit) and ARMs (adjustable rate mortgages) will end up getting better rates and more affordable payments if the interest rates lower because these short-term rates are (like the prime rate) are linked and move directly with the Fed rate. For example, if the Fed does drop the rate by 25 basis points (0.25), this means a drop of 0.25 in variable rates as well within a month after the Fed adjusting rates.



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