Friday, February 1, 2008

What is the difference between the FED Rate cut and the BOND market, and how does it affect my adjustable rate payment?

If you are looking to purchase a home or to refinance, I'm not so sure you'll see mortgage rates fall. Mortgage rates don't have that much room to fall.
Last week, the average rate for a 30-year fixed mortgage was 5.48%, one of the lowest rates since 2004, according to Freddie Mac's survey.
On Wednesday, the Federal Reserve's Open Market Committee lowered the target for the federal funds rate by 50 basis points to 3%. In eight days the Fed has cut rates by 1.25 percentage points, the fastest pace in 20 years.

After the Fed's move, market rates for 30-year notes and 10-year bonds rose steeply. By contrast, rates fell sharply for 3-month and 6-month bills.

Fixed-interest mortgage rates are set by markets based on long-term money rates, not short-term rates. If bond investors fear that the Fed is letting inflation get out of control, then long-term rates could rise, as they did on Wednesday after the rate-cut decision.

I don’t see mortgage rates soaring, they should be attractive for quite some time and the weakness in the economy will keep long-term rates from rising too much.

Interest rates for other consumer products could drop. Adjustable-rate mortgages and some credit card rates are tied to short-term rates that closely follow the federal funds rate set by the Fed.

Consumers will see rates on home-equity lines and credit cards tumbling over the next two months. With home-equity rates falling it will present an opportunity for financially well positioned homeowners with significant amount of equity to borrow at a very attractive cost.