Mortgage Topics

Mortgage rates jumped higher today by 0.25% on news of the Fed Funds rate cut. The Federal Reserve, in an emergency meeting early this morning, cut its key rate - the Fed Funds rate - by 0.5%. This brings the Fed Funds rate to 1.5%.

Fed rates cuts are seen as inflationary, as lower rates are meant to be an economic stimulant and as such lead to price increases of commodities and consumer goods. Mortgage rates on long term fixed rates jump higher on any inflationary news as investors know that a static bond they purchase today will be worth less tomorrow due to an increased risk of inflation. However, given the perilous state of the US economy, mortgage rates on government backed conforming loans are expected to stay low.

On the bright side, a lower Fed Funds rate means consumers will be able to start seeing a reduction in home equity lines of credit (HELOC), credit card, car loans and other kinds of consumer debt, directly linked to the Fed Funds rate. For example, HELOCs are tied to Prime Rate (Fed Funds Rate + 3% margin). Prime rate is down from 5.0% to 4.5% on today’s interest rate cut. Consumers will notice the lower payment on the next payment statement.

The U.S. Federal Reserve Bank led a rare coordinated rate cut along with Central Banks of 6 other nations including Europe, Canada, China, Switzerland, UK and Sweden. Given the enormity of the financial crisis, it became evident that central banks had to make an unprecedented move. The Dow has plunged nearly 2,000 points or 17.6% lower than where it was before the record one-day point drop of 777 points on Sept. 29.