Typically, when the Federal Open Market Committee cuts interest rates, like it did earlier in the week, the rate consumers pay for a mortgage loan falls. But unfortunately for borrowers, these are atypical times.
One only has to open a newspaper or turn on a TV to hear about the malaise in the housing market, with record numbers of consumers facing foreclosure. With concerns over the credit worthiness of would-be borrowers and banks sitting on a boatload of bad loans, consumers looking to refinance or get a new mortgage are suffering.
“This interest rate cycle has been unique,” said Mike Larson, a real estate analyst at Weiss Research. “At the same time the Fed is cutting rates there’s near panic at times in the credit markets.”
According to Larson, since most mortgages these days are originated at banks, which in turn sell them to secondary markets, the ultimate factor for what rate borrowers pay is investor demand for mortgaged- backed securities.
"If there’s strong investor demand for the mortgages it drives down the interest rate," said Larson. "If investors stop buying those securities, the rate you and I pay for the loans go up."
When the Federal Reserve cut interest rates back in January, mortgage rates fell ahead of the cut, but inflation fears drove bond prices down and sent mortgage rates back up
“The Fed’s actions to help the investment banks and broker dealers earlier this week and the decision Wednesday for the government to increase the size of the availability of capital has done more to reduce lending costs than rate cuts," said Joseph Battipaglia, chief investment officer at Ryan Beck. “There’s money out there to be lent…for qualified borrowers.”
According to Battipaglia, if you’re looking to refinance your mortgage and have the ability to wait, you may be better off sitting tight for a couple more months. He expects the housing market to improve in the second half of the year and once credit markets return to a state of normalcy, lending conditions should improve.
For people with home equity lines of credit, they should see a benefit from the Fed rate cut, noted Weiss’s Larson. Since home equity lines of credit are tied directly to the prime rate, which is the interest rate banks charge their most credit-worthy customer, Weiss said those lines of credit almost always fall in lockstep with the federal fund rate. Larson did note it takes a month or two for the rate you’re paying on your home equity line of credit to catch up.
Lita Epstein, an author and credit expert, said there is a way to get a better interest rate on the heels of a Fed rate cut, even if it’s not benefiting the public at large. To capitalize, she said you have to act fast. According to Epstein on the day the cut happens the banks don’t know what their competitors are going to do, so you can take advantage of the uncertainty and drive a hard bargain.
“I locked my loan at 4.5% in January, the day after the Fed cut," said Epstein. “The banks are still figuring it out and are more willing to bargain.” Epstein said that if you don’t get a 1% decline in your mortgage rate, it’s not worth refinancing because of the closing costs associated with a mortgage refinancing. And if your credit score is less than 688 at the most, the harder it is to get that loan, she said.
By: Donna Fuscaldo
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