Fed Drop Rate, Peoples Misconception

Fed just recently drops the rate by 0.5 %. What does this mean?  Many people think that the rate for their mortgages purchases and refinances will drop by that same amount, this is never true.  Fed Rate affects what is called the ‘Key Rate’ this rate is for “Short-Term” rates, and it directly affects short term investments such as CD and other short-term notes.  Mortgages are usually “Long-Term” notes of 30YR Fixed.

Many times the Mortgage rate traded by the lenders in the mortgage industry have already factored in the expected rate drop or rate increase of the Fed, so at times if the Fed drops lower than the expected drop, it could mean that mortgage rates instead of going down they could go up.

So that’s just a misconception that we in the mortgage industry always hear about, Fed drop rates, can I get a cheaper rate now? The answer is: sometimes yes and sometimes not… but the question:  Fed Rate dropped 0.5 can I get a 0.5 rate reduction, the answer is mostly always no.  

Price of the market rate for mortgages depends on the expected traded value, plus the actual supply and demand for such notes.

By Tony Cole 

Tags: Economy

Updated on Friday, Oct 31 2008 12:31 AM PDT

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