Expecting Mortgage rates to fall? Not necessarily so!
Many of you may be thinking that recent Fed rate cuts will automatically have the effect of lowering mortgage rates. After all, rates did fall, right? Well, yes, but there is more to it than meets the eye. "If you are looking to purchase a home or to refinance, I'm not so sure you'll see mortgage rates fall," said Bob Walters, chief economist for Quicken Loans. "Mortgage rates don't have that much room to fall."
Recently, 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. The Federal Reserve's Open Market Committee again lowered the target for the federal funds rate by 50 basis points to 3%. In a space of eight days the Fed has cut rates by 1.25 percentage points, the fastest pace in 20 years.
So, why would mortgage rates not be lowered accordingly? Well, remember that Fed rate cuts act exclusively on short term rates (3-month and 6-month bills). They fell sharply. So, interest rates for Adjustable-rate mortgages (ARM's) and some credit card rates can be expected to fall. And, those of us with HELOC's have, and will continue to benefit from lower rates in the near term. "Consumers will see rates on home-equity lines and credit cards tumbling over the next two months," said Greg McBride, senior financial analyst at BankRate.com. McBride goes on to warn, "Particularly with credit card debt, don't use the lower rates as an excuse to pile on more debt, or put your debt repayment plans into hibernation."
Now, conversely, after the Fed move mentioned above, market rates for long term obligations such as 30-year notes and 10-year bonds rose steeply. 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 recently after the rate-cut decision. If weakness in the economy continues, however, long-term rates will be restrained from rising too much. Bill Hampel, chief economist for Credit Union National Association, said he doesn't see mortgage rates soaring. "Mortgage rates are going to be attractive for quite some time,"