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How does the Fed’s rate cut affect us?

Mortgages, home equity lines of credit, auto loans, credit card rates, certificates of deposit, and money market accounts can all be influenced by changes is short-term interest rates set by the Federal Reserve. But don’t count on getting a lower interest rate; first, read the fine print in whatever contract you are signing. The only interest rate that will automatically drop is the federal funds rate, which is what banks charge each other on overnight loans.

Consumers are often confused when it comes to the subject of the Federal Reserve and how it affects mortgage interest rates. News coverage of the Fed can actually cause the confusion.

The Fed affects short-term interest rate maturities, the Federal Funds Rate, and the Overnight Lending Rate. These factors have a direct impact on the Prime Rate. However, it is a mistake to conclude that changes made by the Fed will cause a similar movement in the interest rates. Mortgage interest rates fluctuate with the market for mortgage backed securities, which trade on a daily basis, but are not widely published. Money to purchase mortgage-backed securities comes from overseas investors as well as domestic investors, and the flow of huge sums of monies to and from these securities is subject to competition from the stock market and complex economic and political influences.

A key (but not infallible) indicator for the movement of mortgage interest rates is the 10 year Treasury bond yield. It is widely quoted, and if it is heading up, you should be prepared to face higher mortgage rates. It fluctuates constantly, just like mortgage rates.