One of the greatest potential sources of confusion for prospective mortgage borrowers is the relationship between the Fed and mortgage rates. While the Fed’s policy changes absolutely have a big impact on all sorts of interest rates (including mortgages), a drop in the Fed’s policy rate DOES NOT result in lower mortgage rates. In fact, the OPPOSITE was true today.
The main reason for confusion is the fact that there’s a huge difference from an investment standpoint between a rate that governs the shortest-term transactions (The Fed Funds Rate applies to loans that last for 1 day or less) and a rate that can remain in effect for up to 30 years in the case of mortgages. Even if we use the average life span of a 30yr fixed mortgage, we’re still talking about 5-10 years depending on the broader market landscape. You may have heard about the “inverted yield curve?” That’s a reference to vastly different behavior between longer and shorter term rates, and it stands as evidence of the different sets of concerns that apply to each side of the duration spectrum. The differences are only more pronounced when we take the shorter end of the spectrum all the way down to the “overnight” level (Fed Funds Rate) and all the way up to the duration of the average mortgage loan.
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Source: mortgagenewsdaily.comNew feed