August 1st, 2019 11:24 AM by Jackie A. Graves, President
Reserve lowered interest
rates at its July meeting, but only some mortgage borrowers
need to pay attention, including those with adjustable-rate loans. The majority
of Americans, who have fixed-rate mortgages, won’t be
The Fed cut
rates by 25 basis points from 2.25 percent to 2 percent. Here’s what it means
for home shoppers and homeowners.
will happen to long-term fixed mortgages
Keep in mind
that 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
are so low today because the popularity of that note has driven its price up
and its yield down (there is an inverse relationship between bond prices and
yields),” says Robert Frick, corporate economist at Navy Federal Credit Union.
can be indirect impact on long-term interest rates if, for example, the Fed
surprised economists and didn’t lower rates. This move could indicate that the
Fed isn’t promoting growth, which could prompt U.S. markets to react.
scenario, I think short-term rates would move up, but long-term rates could
conceivably decline if markets ‘think’ the Fed isn’t acting aggressively enough
to support the economy and will eventually have to cut short-term rates even
more. But that’s not our call,” says Nancy Vanden Houten, CFA, senior economist
at Oxford Economics.
loans will get cheaper
of the rate cut are borrowers with variable-rate loans. The bigger the loan,
the bigger the savings. So, home equity lines of credit (HELOCs) and adjustable-rate mortgages (ARMs) will get
less expensive if rates drop. This is because those interest rates are tied to
short-term rates such as the prime rate, which moves in lockstep with the
federal funds rate.
A drop in the
federal funds rate 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.
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 LLC.
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.
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. Fixed-rate mortgages
aren’t expected to decline because of the Fed rate cut, as they’re already
largely priced into the current level of market rates, Vanden Houten says.
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 rates are some
two percentage points below the historical average, Frick says, so waiting for
even lower rates can mean missing an opportunity-in-waiting.
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