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feds cutting interest rates - effect on mortgage???


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Does anyone know how the feds cutting interest rates affects mortgage rates? I assumed that if one goes down the other one does but I guess that's not the case because one is short term and one is long term.


I want to refinance my house but am unsure when to do it. I keep reading conflicting reports. I read a few that said that the rate cut will eventually trickle down to mortgages so I thought I would just be patient and watch it. Now I just read something that said that this last rate cut may actually increase mortgage rates.


Does anyone know how it works that can explain it to me? How do I know when the best time is to refinance?

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Fed funds rate is the base for US short term interest rates. As such when fed funds rate falls, prime rate falls and any other rates tied to the fed funds rate falls. Short term mortgage rates (1 to 3 year arms) are tied to the ffr. Long term mortgage rates are tied to the 10 year T-note.


What the fed is trying to do is limit the defualt of mortgages that were obtained under the variable rate mortgages.

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People tend to buy more house (higher mortgage rates) when they get a lower interest rate. Utimately the payments aren't lower, but the money they're putting towards interest is lower.


However with the market the way it is housing prices are unlikely to increase IMO.


Hope that made things clearer for you.

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Here's how the mortgage and related monetary system works.


Mortgage rates come in two types, fixed or adjustable. Fixed rates are determined by the mid term treasury bond market (10yr T-Bills). Fannie May and Freddie Mac price their rates by monitoring the daily average of the bond through the day. This is why fixed rates change on a daily basis, even sometimes multiple times a day. This is the reason why when applying for a loan one should lock the rate. Adjustable rates are determined by the index that the lender choses to follow. Most FHA and conforming variable rates follow the local federal reserves' cost of funds index (COFI). Some other more aggressive variable rate loans follow the short term treasury bills or the London Inter Bank Offer Rate (LIBOR) or other wall street index fund rates.


Now for monetary policy. The Federal Reserve (central bank) manages the amount of cash in the system by adding or subtracting cash in the economy. How does it do it? By three methods. First, it adjust the reserve requirement that banks are required to keep as cash on hand. Second, it sells or buys treasury instruments for the federal government in the bond markets. And third, it adjust the over night lending rate and discount rate that member banks can charge each other or directly borrow from the central bank. These methods are controlled by the Federal Open Market Committee (FOMC) which Ben Bernanke chairs a 12 member board.


How does it all come together to affect your mortgage rate? As the federal reserve increases the money supply it must lower over night rates fed fund rate and discount rate along with buying or cashing out treasury bills from investors and some times in conjunction by lowering the cash at hand requirements for banks. These actions introduce a large amount of capital into the economy where banks can flood the markets with cheap cash. As the cheap cash trickles down it effectively lowers the cost of borrowing to us. Simple supply and demand explains the rest. The more cash there is available the less the demand which will lower the price of the monetary commodity, cash. This is how The Fed controls the overall US economy which affects the world's economy.


Now the big question. When should you refinance? My advice is to wait until the late summer of 2008. The projections are that as the credit crunch hits lenders assets hard in the first six months, these lenders will start to accept losses on non performing assets. Once this truth is reached the banks will quickly move to clear their books and at the same time create tough loan qualification protocols to protect their current assets. Plus, the Fed's intervention usually takes about six months to soak into the general economy. I can give you more accurate advice if I knew more about your fiscal discipline and goals. To understand the loan process and fees involved please read my old thread below and get back to me with further questions, if any.



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