Posts Tagged ‘Federal Funding Rate’

Federal Reserve’s impact on rates

March 21, 2017

I feel like I spend a lot of time devoted to the topic of the Federal Funds Rate. The main reason is the misconception out there when it comes to the Federal Funds Rates. Last Wednesday, the Feds raised the Federal Funds Rate again. Every time this happens, I get calls and emails with people worrying about mortgage rates going up. That isn’t necessarily the case.

Mortgage rates are not determined by the Federal Funds Rate… car loans, credit card rates, second mortgages… those are impacted by the Federal Funds Rate.

Mortgage rates are determined by the value of Mortgage Backed Security Bonds (MBS bonds). As these bond values go up, mortgage rates go down. When these bond values fall, mortgage rates go up. Typically, when the Federal Funds Rate increases, it should help mortgage rates improve. Why?

MBS bonds hate inflation… I mean they can’t stand inflation. As inflation rises, MBS bond values plummet and make interest rates worse. As the Feds increase the Federal Funds Rate, it helps fight inflation. This, in turn, helps MBS bond values to rise, and mortgage rates to improve:

  • the Federal Funds Rate increased in December 2015. Over the next few months, mortgage rates improved by 0.500%. Rates stayed around these levels for all of 2016. Rates got worse at the end of 2016 after the election fueled a major stock market rally. That triggered another typical trend with rates… when stock values go up, bonds go down, and mortgage rates go up.
  • The Funds Rate was increased again in December 2016, and mortgage rates improved by 0.125% in the 6 weeks between Fed meetings.
  • We are about a week past the most recent rate increase by the Fed (third time since December 2015). So far, mortgage rates have improved by another 0.125%

What does this mean? When you hear a story about mortgage rates rising because of the Federal Funds Rate going up, don’t panic. The Funds Rate may go up, but mortgage rates could improve.

If you are looking to buy a home in Georgia, contact me today to get started. We have two tools to help you in an ever-changing rate market.

  • Float Down: Should rates improve after we’ve locked your rate, we can float it down at no cost to you one time during the loan process. If rates improve by 0.250% or more, we are within 30 days of closing, but 8 days prior to closing, we can float the rate down to current market value. That’s it. Easy! We have a three-week window to take advantage of this.
  • Lock-and-Shop: Worried that rates might go up? Don’t be. We can lock a rate for 60 days without being under contract to purchase a home. The rate is locked, find a home, and we start the loan process. The Float Down option as described above also applies to the Lock-and-Shop. So, you can get the protection of locking the rate, but also the opportunity to lower the rate should mortgage rates improve. The rate will not get worse so long as it is locked.

It is as simple as that!

Feds may not raise rates at all this year

October 18, 2016


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Well over a year ago, the Federal Reserve indicated they would begin raising the Federal Funding Rate. This started in December 2015 when the rate increased by 0.250% for the first time in almost a decade. While we didn’t expect a 0.250% increase each time the Feds met this year, surely there would be another increase at some point. Right?

The year is almost over, and the Feds have stood their ground. The comments from the most recent Fed meeting made it sound as if it is doubtful there would be an increase this year, but could be in 2017 as the economy continues to reach employment goals.

Does that mean potential buyers should panic as rates may go up in 2017? No, it doesn’t.

  • The Federal Funding rate does not impact mortgage rates. When the Federal Funding rate increases, rates go up on second mortgages, credit cards, car loans, etc.
  • Mortgage Rates go up and down along with the value of Mortgage Backed Security Bonds. To see plenty of previous posts on this topic, do a search for “MBS” in the “search this site” box in the upper right corner of the page.
  • The last time the Feds raised the Federal Funding Rate, Mortgage Rates improved. Rates are roughly 0.500% lower now than they were in December 2015.

So what to make of this? Don’t make home buying plans on what the Feds may or may not do. Don’t buy a home out of fear of rates going up. The best strategy is to get prequalified to buy a home, and purchase a home when the time is right for you… and not what the Feds or media dictates.

Looking to buy a home in Georgia? Contact me today. I’ll get you prequalified and get you ready for your home buying experience.

 

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Feds have opposite impact on mortgage rates

February 22, 2016

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Seems the increase of the Federal Funding Rate didn’t have the negative impact on mortgage rates that many of us read about/heard about in the media. Since the Feds increased the Federal Funding Rate, mortgage rates have improved by at least 0.375%. Mortgage rates now sit at their lowest point since the beginning of 2015.

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As bonds values go up, mortgage rates go down.

Why did mortgage rates improve if the Federal Funding Rate increased by 0.250%?

As previously discussed in this blog, mortgage rates are determined by mortgage backed security bonds. As these bond values trade, mortgage rates change… when bond values go up, rates go down and vice-versa. Also, when stocks endure bad times, bonds excel. This means as stock values drop, bond values rise, and in-turn, mortgage rates improve.

We all know what happened on Wall Street in January/early February. The Dow posted some historically bad numbers. Whether people were afraid of the price of oil, the oil glut, the Feds raising the Federal Funding Rate, or something else, stock prices plummeted, and so too did mortgage rates.

How should consumers respond:

  1. Don’t worry about interest rates getting better after you’ve locked in a rate. We have a float down option on our rate locks. If rates improve, your locked rate may be able to improve too. The rate will not get worse so long as it is locked. In other words, your rate could get better, but not worse. I’ve had several clients take advantage of this feature in the past two months.
  2. If you are thinking of buying a home (or refinancing), now would be a good time to get serious about it. Mortgage rates are not far off of their all time historic lows. Even if rates improve, you can use the float down option I just described.

Looking to buy/refinance a home in the state of Georgia, contact me today to get started. We’ll get through the prequalification process and get you ready to buy your new home!

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Is there a better day to lock a rate?

November 10, 2015

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Last time, we discussed how mortgage rates change. It isn’t from the Federal Reserve raising rates. Mortgage rates move up and down along with the value of mortgage-backed securities. As these bond values go up, rates go down – and vice-versa.

Is there a better day to lock a rate? I think a better question is this… how much volatility can you handle?

The two days of the week that see the biggest swing in mortgage rates are Wednesdays and Fridays. That isn’t a surprise since the Federal Reserve release their meeting minutes on Wednesdays. Those meeting minutes are definitely market changers. Fridays is typically the day when economic news is released – such as the jobs report. Again, this can have a big impact on interest rates.

Mondays are the quietest day of the week as the Fed doesn’t release any information on Mondays, and very few economic news releases come out on Monday.

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Do you like to hit at 17 when playing Blackjack? If so, then waiting to lock a rate until Wednesday afternoon or Monday morning (from Friday’s market changes) might be the way to go. Depending on the market that day, you may see rates get better (or worse) by 0.125%.

Don’t have the stomach for gambling? Want to think about a rate prior to locking? Then a Monday rate quote/lock is probably best for you.

Want to know more about rates, how they change, and why you should lock. Contact me today for more information. If you live in the state of Georgia, I can also prequalify you for your new home loan.

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The Fed holds, but rates went up?!?

November 5, 2015

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The Federal Reserve announced last week that it would not raise the Federal Funding Rate (again), which keeps the rate near 0% as it has been for years now. Guess that means mortgage rates won’t rise.

Well, a funny thing happened since the Fed’s announcement. Mortgage rates have gotten worse. Say what?!? If the Feds didn’t increase rates, why are mortgage rates going higher?

The answer is this – the Federal Funding Rate does not determine mortgage rates. Mortgage rates are determined on the value of mortgage-backed securities. These are a type of bond that trade every day like stocks. Their values can go up (and lower mortgage rates), or their values can go down (and increase mortgage rates). If mortgage-backed security bonds have a dramatic shift during the day, just like the Dow can, then we may see mortgage rates change more than once a day.

This means mortgage rates, like stocks, are driven by the market and not by the Federal Funding Rate. Remember the Quantitative Easing (QE) program from a year or so ago? This was the Federal Reserve purchasing mortgage-backed security bonds to increase their value, and lower mortgage rates. The Fed attempted to influence the rate market, and it couldn’t do that by simply lowering the Federal Funding Rate.

So what does the Federal Funding Rate actually impact? Great question! The Federal Funding Rate impacts car loans, home equity lines, credit cards, etc…. not mortgage rates.

Remember, next time you hear a news article about “rates going up,” it may not have anything to do with mortgage rates. Those can increase at any time depending on the market. More questions? Contact me today and I can answer them for you. If you live in the state of Georgia, I can also help you purchase your new home!

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QE3 is officially over

November 3, 2014

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As promised, the Federal Reserve ended their Quantitative Easing (also called QE) program last week. This wasn’t unexpected. Toward the end of 2013, the Feds announced they would begin tapering off their purchasing of bonds, which included mortgage backed security bonds (or MBS bonds). The Feds had several objectives in buying bonds, and one of them was to help push interest rates lower. They achieved that goal by purchasing MBS bonds. As the value and demand of MBS bonds increases, interest rates decrease.

The purpose of tapering was to prevent a financial market that was accustomed to the Feds purchasing bonds from freaking out by its sudden withdrawal. A practical example – the Feds were acting as though they were introducing a fish to a new aquarium. You keep the fish in the bag of water it was placed in at the pet store, and let the fish float in the bag of water in the new aquarium to get adjusted to the water temperature of its new home. If you don’t do this prior to releasing the fish, the shock could kill it.

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With the Feds officially out of the bond buying business, one of the instruments that helped interest rates reach historic lows is gone. Will interest rates rise? Most analysts thought rates would in 2014, but rates are a little lower now than they were in January 2014. That said, rates aren’t far off their historic lows from a couple years ago – meaning, rates have much more room to get worse than to get better.

One important point to clarify in the Feds statement. The Fed’s plan is to continue to keep short term lending rates near zero for the foreseeable future. Short term lending rates and interest rates are not the same thing. The short term lending refers to the Federal Funding Rate. Interest rates are determined by the value of MBS bonds, which change daily just like the stock prices of Apple, Google, UPS, etc. The Feds are no longer trying to influence MBS bonds now that QE3 is over.

What does this mean for those looking to buy a home? The simple answer is, we don’t know. Interest rates could stay the same or begin to get worse. Instead of knowing the Feds are in the background helping to keep MBS bond prices high, their values are now dependent solely on market factors.

If you are looking to buy a home or refinance, look to get started soon. Everyone has expected interest rates to rise the past few years, and they haven’t yet. Still, as I said earlier in this post, interest rates have a lot more room to get worse than to get better. If you are looking to buy in Georgia, contact me to get started.

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QE3 Tapering begins in 2014

December 19, 2013

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The Federal Reserve announced Wednesday afternoon that the “tapering” process will begin in January 2014. Apparently there will not be a QE4-ever after all!

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The Federal Reserve has purchased bonds for several years now, and as much as $85 billion worth of US Bonds each month since September 2012. The process was called Quantitative Easing or QE as it is commonly known. QE was a two step process the Feds used to help stimulate the economy.

  • Step 1 – by 2008, the Federal Reserve dropped the Federal Funding Rate to near zero. This was to encourage short term borrowing to stimulate the economy. The lowering of the Federal Funding Rate is a common tool used by the Federal Reserve during a recession.
  • Step 2 – due to the severity of the financial crisis, the Federal Reserve began purchasing US Treasury and Mortgage Backed Security Bonds to lower long term lending to help stimulate the housing market along with the auto industry. This strategy was the QE, which turned into QE2, and QE3. The QE’s were partly responsible for the historically low interest rates the country has grown accustomed to seeing. Without QE, interest rates would have never got as low as they did over the past few years.

Instead of having a hard end to the QE program, the Federal Reserve will taper-out of QE. In January, the bond purchasing will reduce from $85 billion per month to $75 billion. The amount purchased each month moving forward will be reviewed at each Federal Reserve meeting and QE will eventually come to an end in a year or two.

By slowing reducing the amount of bonds being purchased, the Federal Reserve hopes the interest rate market has a slow and steady climb on interest rates instead of a volatile and rapidly rising rate market. In theory, historically low interest rates should still be available in the coming year, but rates won’t be as low as they were in 2012 and early 2013.

If you are looking to refinance or purchase a home, how should you respond to this?

I’ve spoken with several clients this year who decided to wait for interest rates to get lower. With the rapid rise in rates starting in early May, some people felt interest rates would eventually fall. With the announcement of tapering, we won’t see interest rates get as low as they have been in the past few years.

The goal now should be to look to get into your new home OR start that refinance process today while rates are still low. To get started, contact me. If the property is in the state of Georgia, I can help you through the loan process.

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If you have an ARM, what do you do?

February 24, 2010

 

So, you have an adjustable rate mortgage, what to do, what to do?

A lot of consumers took advantage of low mortgage rates five years ago by taking out an adjustable rate mortgage.  These mortgage loans, generally fixed for 3 years or 5 years, 7 years or 10 years, allowed consumers to save thousands of dollars in interest by having an interest rate below the rate of a fixed rate mortgage.

For example, on a $300,000 mortgage, in November of 2004, you could get a 5/1 ARM (principle and interest payments) at 4.5%.  The comparable 30 year fixed rate loan at the time was around 5.375%, giving the adjustable rate mortgage a monthly savings of $159 per month . . . or $9,540 over the first 60 months (5 years fixed term).  Saving $10,000 is good, not toxic, or exotic, or evil as the media has vilified ARMs; a $10,000 savings is a good thing.   In fact, in 2004, Alan Greenspan agreed that savings thousands of dollars is a good thing, stating that “American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage.” (source: usaToday.com here). 

My prediction — the NEXT big headline against the mortgage industry (give it 12 to 24 months to materialize) will deal with consumers with ARM’s NOT refinancing to fixed rate mortgage when rates were at an all time historic low (ala, now).  The media will likely talk about how confused consumers, not fully understanding the terms of their risky exotic mortgage  . . . (breathe, 1, 2, 3 . . . more on that next time).

So, for any consumer who HAS recently refinanced their ARM in to a fixed rate mortgage, EVEN if you spent $6,000 in closing costs to refinance, you have still saved $3,540 when compared to the 5.375% fixed rate mortgage you could have started with.  And, in addition to that savings, you now have a rate in the high 4’s, where if you would have still have had the 5.375%, you may have just kept it, because the difference between the two is probably not enough to warrant the refinance (an additional $115 in savings per month). 

So why are consumers NOT refinancing out of their ARMs in to historically low fixed rate mortgages??  For some it is because they can not refinance their mortgage (low appraised values, loss of income, 2nd mortgage unwilling to subordinate).  But for others, it is because their interest rate has actually gone DOWN.

Continuing with the example above, with a start rate at 4.5% in November of 2004 (lets also assume the ARM in the example is based on the LIBOR index with a 2.25% margin) . . . in November of 2009 at the time of adjustment, the LIBOR index was around 1.95%, which means that the interest rate would adjust to (index + margin), 1.95% + 2.25% = 4.25%.   Assuming this loan is a standard conventional principal and interest ARM, the rate of 4.25% would now be fixed for 12 months, and the payment would go down by $45 per month . . . even more savings!  If your interest rate were to adjust today (February 2010), because the LIBOR index is even lower, the rate would adjust down to 3.25%!

And WHY IN THE WORLD would anyone pay $6,000 in closing costs to refinance out of a 3.25% interest rate??

Here’s why:

1 — Historically low rates will (will) [will] (will) come to an end.  Economist agree that interest rates WILL go up — how quickly and how high is certainly up for discussion.  The Feds program to purchase mortgage -backed securities (MBS)  is ending March 2010 (next month) and supply and demand tells us that rates will go up.  The Feds are providing the demand for purchasing MBS, with them stepping out, the demand will go down, prices will go down, and when prices go down, mortgage rates go UP.

The Feds announced their MBS purchase program in November 2008 and look what happened to rates immediately.

2 — Your next adjustment will be UP (very likely).

Most people assume that when the Feds “raise rates” that mortgage interest rates go up.  While this is sometimes true, the Feds actually move an internal banking rate known as the Federal Funding rate.  While the Fed’s Fund rate is not tied directly to mortgage rates, it does track with the LIBOR index.  And as the Feds “raise rates” the LIBOR index will follow.  The 5 year average for the 12 month LIBOR index is 3.9.  Using this as an assumption of where it might stand a year from now, 3.9% index + 2.25% margin = 6.15%.  Taking the scenario above, and your payment from 3.25% to 6.125% just went UP more than $500 per month! 

3 — Refinancing now is better than refinancing later (likely).

Instead of an increase of $500 per month (3.25% to 6.125%), that $300,000 mortgage could be refinanced at 4.75% = an increase in payment of $260 per month from 3.25%, but a savings of $257 when compared to 6.125%.  Assuming the closing costs are $6,000 to refinance now, and assuming that the following year (2011) the ARM would stay around the 6.125% (which may be the BEST case scenario), the closing costs on a new refinance would take 23 months to recoup.  Which means, assuming that you are going to stay in your current home for more than 2 years from today, you should refinance . . . you should refinance, now . . . unless you think interest rates will go lower . . . which they aren’t . . . so you shouldn’t think . . . so you should . . . refinance. 

You’ll be glad you did . . . wishing I knew the emoticon for “call me.”  🙂