The Federal Reserve Rate Cut and how it affects you

December 17, 2008
Matt Isleib

 

On Tuesday the 16Th the Federal Reserve cut the Federal Funds rate to a range of 0-.25%. Fed Chief Ben Bernanke is clearly concerned about  the deteriorating economy. The labor market has deteriorated ans spending and production have declined.

 

Often people think that because the Fed has cut interest rates that it is going to bring mortgage rates down as well. It is not how that works.  The Federal Funds rate in laymen terms is the interest rate that banks charge for funds borrowed from other depository institutions overnight. The Federal Funds  rate is how the Fed helps regulate the supply of money in the U.S. economy.

 

Interest rates, specifically mortgage rates are derived from several sources. For one fixed rate mortgages are tied to the 10 year treasury bond as well as the trading of mortgage backed securities on the open market. The Federal Funds rate has no direct baring on mortgage rates.

 

For those of you who have home equity lines of credit or (HELOC’s) potentially could see a drop in your rate as those rates are tied to the Prime rate. Some credit cards are also tied to the Prime rate so you could see a drop in those rates as well.

 

-The most important excerpt from the recent Fed meeting is the announcement from the Fed that they could expand on their already announced program to buy debt and mortgage backed securities from Fannie Mae and Freddie Mac. It also confirmed they are looking at buying long term Treasury bonds. Both these two combinations could very well help bring interest rates down even lower. Which means if you are looking to purchase or refinance in the near future you very well could be looking at a substantially lower interest rate!

Applying for and shopping mortgage rates in CT is a click away www.EversleyCapital.com