When the Fed cuts rates, do mortgage rates drop?
By: Spencer Rascoff, Zillow COO | October 31, 2008
This week, the Federal Reserve cut the “federal funds rate” from 1.5% to 1% and the “discount rate” from 1.75% to 1.25%. What does this mean? Well the federal funds rate is the rate that banks lend money to other banks overnight. The discount rate is basically the interest rate that the Federal Reserve charges banks when they borrow money from the government. So in short, a “Fed rate cut” basically makes it cheaper for banks to borrow money from each other and from the government.
There is a common misperception that when the Fed cuts rates, mortgage rates also drop. This is not necessarily the case. In fact, 30 year fixed mortgage rates have actually risen in Zillow Mortgage Marketplace since the Fed cut rates earlier this week.
Why? Well just because it’s cheaper for banks to get money doesn’t mean they pass those savings on to borrowers. Mortgage rates fluctuate based on supply and demand for mortgages — they drop when banks’ propensity to lend increases. Unfortunately, in this crazy lending environment, lower borrowing costs for banks do not necessarily translate into lower borrowing costs for mortgage holders. The one exception is loans (e.g., HELOCs) which fluctuate based on a particular rate such as the discount rate or the prime borrowing rate. Those loans do adjust when the Fed cuts rates. But on the whole, it’s a mistake to assume that when the Fed cuts rates, mortgage rates decline.
For more information about this admittedly confusing topic, check out our Mortgages Unzipped blog and our Discussions section on mortgages.
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- Categories: Home Mortgage, Mortgages
Comments
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Jonathan Blackwell on November 3, 2008 6:08 pm
Fed cuts can be inflationary, thus the fact that at a certain point they often have an effect of increasing mortgage rates instead of lowering them.
http://www.USDADevelopment.com on November 3, 2008 6:10 pm
I believe the last few times they have increased each time a cut was made
ModifyMyHousePayment.com » Blog Archive » Mortgage Rates on November 4, 2008 12:51 am
[...] When the Fed cuts rates, do mortgage rates drop? [...]
Jason Evans on November 10, 2008 8:45 am
Mortgage rates are determined by Mortgage Backed Securities (MBS). Banks do not determine mortgage rates based on the rate they are able to borrow money from other banks for. Banks determine rates based on how much they can sell the mortgages they originate for on the secondary market. They sell pools of loans into the MBS market therefore the price of MBS determines the interest rates banks offer consumers.
Fed Cuts Rates and Mortgage Rates Go Lower on Zillow Mortgage Marketplace | Zillow® Blog on December 16, 2008 6:27 pm
[...] zero and 0.25 percent. Wall Street cheered and the stock market gained on the news. Usually, when the Fed cuts rates, mortgage rates don’t always drop. Today, however, we’re seeing mortgage rates on 30-year fixed mortgages drop to 4.92% at [...]
Loan Modification Guy on May 3, 2009 12:48 pm
The days of tracking the 10yr treasury bonds to determine the days rates are sadly gone…
Buy To LetMortgages on October 30, 2009 6:05 am
Lending should surely reflect the savers rates.