Fed Rate Cuts May Not Lead To Lower Mortgage Rates in Flagstaff

Today’s Federal Reserve action may an impact on housing contrary to what you may be hearing. Borrowers waiting for a lower fixed-rate mortgage may be waiting for a long time. The Fed funds rate is not directly tied to mortgage rates, and may, indeed, work in the opposite direction of long-term mortgage rates. If the interpretation of the rate cut over the next few days continues as the initial market reaction (the dollar fell sharply, long-term Treasury-bond yields rose, and oil prices also jumped), mortgage rates will rise.

If you have a Home Equity Line of Credit (HELOC) or credit cards tied to the Prime Rate, the Fed's cut in the Fed Funds Rate just put a little money in your pocket. That can improve consumer spending. But if you are planning to buy a home, the Fed’s rate cut may mean you should lock in your interest rate and buy now rather than wait. The Fed funds rate cut actually is more likely to increase mortgage rates in the next few months than to decrease them.

The chart below clearly shows how Fed Funds Rate cuts do not translate into cuts in fixed-rate mortgages. In January 2001, the Fed Funds Rate was at 6% and 30-year fixed rates averaged 7.03%. By December 2001, following 4.25% in cuts throughout the year, home loan rates were actually up to 7.07%.