When the Fed cuts rates, it usually does not equate to lower mortgage rates.
When the Federal Reserve cuts or raises rates, it is changing the Discount Rate and the Fed Funds Rate.? Both of these are short term interest rates that banks use for short term loans.? Mortgage rates are long term interest loans.? Short term and long term interest rates do not follow the same course.? In fact, sometimes they follow opposite courses.
Mortgage rates are based on what?s known as Mortgage Backed Securities (MBS). ?An MBS is basically a bond that is backed by mortgage loans.? Thus, the movement of mortgage rates follows the trading of these MBS on Wall Street.
So what affects Mortgage Backed Securities?? There are many factors but two major ones:
- Certain economic factors, especially reports about inflation.? Reports of inflation being on the rise negatively affect long term bonds, like MBS, because inflation will eat away at future returns of these investments. So if inflation is on the rise, mortgage rates will generally be going up and vice versa.
- Stock market activity.? When the stock market is doing well, traders are pulling their money out of bonds and putting them into stocks.? To make bonds more attractive to traders, the yields of those bonds are raised, thus so are mortgage rates.?? So if the stock market is doing well, mortgage rates will generally be going up and vice versa.?
Predicting the future is tough.? But by keeping an eye on the stock market and inflation readings you can generally know the direction of mortgage rates.