Thursday, May 22, 2008

The Fed’s Rate Cuts May Not Affect Mortgage Rates

Federal interest rates are not directly tied to mortgage markets, therefore have no direct affect on mortgage interest rates. This seems to be one of the biggest misconceptions in the mortgage industry. When the Fed raises or lowers interest rates, the interest rate you are quoted from your lender or mortgage broker may not coincide with this rate.

The main driver of mortgage interest rates are the bond market, more specifically Mortgage Backed Securities. When the demand is high for these bonds, interest rates go up; conversely when the demand is low and the supply is high, the interest rate on a new mortgage will decrease in order to stimulate demand. This is an oversimplification of mortgage rates, but it should help to disseminate the myth that the mortgage market will follow the ups and downs when the Fed changes the rate. Here is an article that discusses this topic in greater detail (

If you are in the market for a refinance in the coming year (2008 into 2009), you probably should not wait to do so. If you have 30% or less equity in your house right now and you need to refinance for any reason (especially if you are in an ARM), you will want to act quickly because at least 50% of applicants in today's mortgage market are running into issues when they have an appraisal done on their property. They find rather suddenly that they have lost as much as 20% (sometimes more) of their equity due to the down real estate market and increasing foreclosures occurring nationwide. The simple fact is that if one of your neighbors fall into foreclosure tomorrow, you may not be able to refinance out of your ARM (Adjustable Rate Mortgage) because you now owe more than your house is worth. This is happening more often then most people realize.

You could go to websites like Zillow ( or Cyberhomes ( to get an idea of the current value in your area. These websites are not exact, and occasionally they can be pretty far off if the property is not considered to be the norm for the area. However, they are a valuable tool to use to get an estimate based on comparable properties in the area. They also show the moving average for home prices and the amount that your property has increased or decreased in the previous two months, seven months, and one year intervals, and since the last sale. Additionally, you could contact an appraiser or Realtor in your area to find out what affects if any, foreclosures are having on your particular real estate market. Realtors and appraiser will usually provide this information free of charge, if you are just looking for general information.

If you are looking for them to name an exact figure for your property, you will need to pay for an appraisal which usually runs between $300-400. If you have no immediate need to refinance, now might still be a good time because interest rates are at six year lows and are not predicted to go below 5.5% par again (30 year fixed rate) for some time. Contact your mortgage lender or broker for details on the current rates, as these rates change daily and have proven somewhat volatile in recent times. This article is simply a word of caution in today's current real estate market. The coming years will probably balance out, and real estate will begin to increase in value again. For the time being it is suggested that you use caution and move quickly if your current equity raises concern for whether or not you will be able to refinance.


Elizabeth said...

Very, very interesting. We are in the market for a house, and this is most definitely helpful info!

Foreclosure said...


Your blog is informative!Thanks for the wonderful info.....

Anonymous said...

the article seems to be interesting but it would be great if you could go in details.