“FED CUTS RATE TO 2%!”

Here’s the scenario:

You need to buy a home, or refinance your Idaho mortgage. You talk with a local lender choose the perfect loan program and rate, at which point you “lock in” your mortgage rate for 30 days — let’s say, at 6.5%.

The next day you see on the news: “Fed cuts rate to 2%.” Hopeful, you call your lender, “Does this mean my rate goes down a point, to 5.5%?”

The short answer is “No.”

Here’s the long answer:
It’s important to understand what “The Fed” is, what “The rate” is, and what affects - short term and long term - an increase or decrease announcement has.

“The Fed,” or Federal Reserve, is sort of a financial think tank and not, as many believe, part of our federal government. They perform information gathering and economic research. Their primary goal: Promote sustainable growth of the US economy. This includes, of course, fending off recession by doing things like keeping an eye on banks, promoting spending (and lending) as a means to infuse cash into the market and thereby help the economy, etc..

Rates monitored and set by the Fed are:

  1. The Discount Rate (interest rate banks pay on short-term loans from a Federal Reserve Bank) and,
  2. The Federal Funds Rate (interest rate at which a depository institution lends immediately available funds to another depository institution overnight).

This Federal Funds Rate is “The rate” that news reports are referring to when they talk about the Fed changing interest rates.

But, and heres the point, they are setting a target for this rate, not the actual rate itself. The actual rate itself is determined by the open market. So depending on a multitude of open market forces, banks may or may not react quickly to these changes, and when they do, mortgage rates may or may not be significantly affected. Credit cards and second mortgages are more likely to see immediate effects of a rate cut.

Many consumer loans are at or close to the “prime rate,” which is generally three percentage points higher than the federal funds rate. Although the prime tends to track up or down with the federal funds rate.

Longer-term, fixed-rate loans such as Idaho mortgages or student loans track with treasury bonds, so they’re not immediately affected by the Fed’s decision, but they follow broadly. On the other hand, many types of adjustable rate mortgages (ARM’s) are more likely to react (change up or down) sooner than later to Fed announcements.

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Written by Lisa Kratz and Mike Little of myIdahoHomeLoan.com
Apex Mortgage  |  Meridian, Idaho  |  (208) 888-9251Apply Now

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