September 18th, 2019 11:01 AM by Jackie A. Graves, President
Reserve is expected to lower rates for the second time this year, pressured by
the ongoing trade war with China. While the likely 25 basis point rate cut
won’t have a direct impact on fixed-rate mortgages, Fed actions do impact the
market which touches lending.
Fed cuts rates by 25 basis points from 2 percent to 1.75 percent on September
18, here’s what it will mean for homebuyers and homeowners.
What will happen to long-term fixed mortgages?
The federal funds rate does not directly
affect long-term fixed-interest mortgage rates; those rates are pegged to the
yield of U.S. Treasuries, which are set by market forces. However, those market
forces are influenced by Fed policy, as we saw in July when the 10-year
Treasury yields dropped after the Fed cut rates.
fixed-rate mortgages don’t move in lockstep with the Fed, they’re not immune to
does have an effect on rates and consumer sentiment because we look to the Fed
for the health of the economy and because policy action does have an impact on
the market,” says Joel Kan, MBA’s associate vice president of economic and
Variable-rate loans will get cheaper
loans, such as adjustable rate mortgages (ARMs) and home equity lines of credit
(HELOCs) track with the Fed rate, so those borrowers will come out ahead if the
Fed cuts rates on Wednesday.
A drop in
the federal funds rate by 25 basis points means a 25-basis point drop in
variable rates, as well. Usually, borrowers will see a change in their lender
statements the month after the Fed lowers rates.
quantify this, on a HELOC of $100,000, every change of 0.25 percent in interest
rate (either upwards or downwards) will cause a borrower’s interest expenses to
rise or fall $250 per year. As this works out to only about $21 per month, it
should not have a very significant impact on most borrowers unless they have a
very large HELOC,” says Daniel Shlufman, Mortgage Banker at Classic Mortgage
with variable-rate mortgages may have to wait a while to see their payments
fall. Such loans typically adjust annually on their anniversary dates. Some
don’t adjust at all for the first two, three, five or even seven years.
What borrowers should do
homebuyers interested in a fixed-rate mortgage or those who want to refinance should
take advantage of today’s low interest rates, experts say. There’s no way to
time the market to get the best deal on rates, says Kan. He points to Friday’s
unexpected 20-basis-points jump in mortgage rates as an example of the
unpredictability of the market.
course of action for homebuyers is to decide whether they can afford the home
they want based on their down payment and current mortgage rates. Today’s mortgage rates
are low by historical standards, so waiting for even lower rates can mean
missing an opportunity.
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