Fed
Drives Mortgage Rates Up?
What every home owner and buyer needs to know about the Fed rate cuts
Ann Arbor, MI, March 18, 2008 – The Federal Reserve slashed the Fed Funds rate by ¾ point to 2.25% from 3.00%. “This action is likely to drive up mortgage interest rates,” said Gibran Nicholas, Chairman of the CMPS Institute, an organization that certifies mortgage bankers and brokers. When the Fed lowers interest rates, they encourage more borrowing and spending in the economy. This has the potential to artificially drive up asset prices and cause money to lose its purchasing power. This phenomenon is known as inflation and scares bond market investors. “Fixed mortgage rates are tied to the mortgage backed-bonds that trade on the bond market,” said Nicholas. “Inflation erodes the value of bonds by reducing the purchasing power of the income stream associated with the bonds. This causes bond investors to sell out, which drives up bond yields and mortgage interest rates.”
The good news however is that the bond market has already priced in an inflation premium as mortgage rates have ticked higher in recent weeks. “Mortgage rates started their upward climb in January after reaching a two year low point and they are unlikely to go much higher from their current levels”, said Nicholas. “Of course, if inflation fears persist, the markets will react accordingly.”
One positive development for homeowners stemming from the Fed’s actions is the decline of the LIBOR and Prime rates. LIBOR is the index that is used on most adjustable rate mortgages in the US. “If you are in the jumbo loan category or if you have or are otherwise considering an adjustable rate mortgage, you could greatly benefit in the near term,” said Nicholas. In light of recent Fed activity, the one month LIBOR is hovering around 2.5%, which means a jumbo loan tied to LIBOR would be between 3.5% and 5% depending on your margin. Compare this with a fixed rate jumbo mortgage in the high 6’s and you have yourself a bargain.
Also, the Prime rate is the index used on most home equity lines of credit and this has gone down significantly over the past several months to its current level of 5.25% from 8.25% in September 2007. Here are two articles that further describe what the Fed rate cuts mean for home owners and buyers:
The Role of the Fed in Today’s Credit Crisis
About CMPS Institute: CMPS is a training, examination, certification and ongoing membership program for financial professionals who provide mortgage and real estate equity advice. The CMPS Institute was formed as a joint effort by leaders in the mortgage and financial planning industries to raise professional standards among mortgage professionals and integrate sound financial planning advice into the mortgage process. Recognized for its preeminence within the industry, the CMPS curriculum represents the core knowledge expected of residential mortgage advisors, regardless of the diversity of specializations within the industry. For more information or to locate a certified professional near you, please visit www.CMPSInstitute.org or call 888.608.9800.
