(This is a guest article by Richard Blair of Smart Financial Mortgage, www.gosfm.com)
One of the most frequently asked questions from borrowers is why home mortgage rates do not fall after Federal Reserve cuts rates. In fact, after each Federal rate cut I get many phone calls from borrowers that are already in the loan process expecting to hear about lower mortgage interest rates. On the other hand, others that have been fence sitting and waiting to refinance are puzzled as to why mortgage rates have not moved lower during the recent five Fed rate cuts. This is difficult to explain to consumers who have watched a 2.25% reduction by the Fed with very little benefit in mortgage rates.
So that leaves us wondering whether a Fed rate cut is really good news for mortgage rates? You may be surprised to learn that the Federal government can only control the Discount Rate and the Fed Funds Rate. This is very different from mortgage rates. While a mortgage rate can be in effect for 30-years the rate set by the Fed can change from one day to another.
After eleven years as a mortgage professional I have learned that the market works in cycles and that history repeats itself. That being said, we can learn from what happened to mortgage rates the last time the Federal Reserve was in a rate-cutting cycle.
The last time the Fed was in a lengthy rate cutting cycle was back in 2001 from January 3, 2001 to December 11, 2001. In the span of 11 months, they cut the Fed Funds rate 11 times with eight of those cuts by a half point. This resulted in a total of 4.75% in short-term interest rate cuts taking the Fed Funds Rate from 6.00% down to 1.75%. Now most uninformed people would naturally think because the Fed cut rates by so much during this time that mortgage rates would follow suit and trend lower as well. Not true. Mortgage rates actually moved higher during this time of significant rate cuts because of inflation. Inflation is the arch enemy of bonds so expect mortgage rates to increase as inflation rises. That is a very real concern currently, especially as the price at the gas pump continues to increase.
Keeping in mind that history repeats itself; let’s look at what happened with the Fed’s most recent cutting cycle, the first since 2001. The Fed cut the Fed Funds Rate last year in September, October, and December and again in January of 2008. The total of these cuts were about 2.25% in a 5- month period of time. After each of these Fed cuts the bond market took drastic losses resulting in higher long term mortgage interest rates. So we see history repeating itself from the Fed cuts in 2001.
By following the market trends very closely I have been able to save my clients thousands of dollars because I have been able to anticipate the rate increases and lock interest rates ahead of the Federal cuts. The strong emphasis that I put on Strategic Loan Planning for both refinances and purchases assures clients that they have chosen the best loan program. Many of the foreclosures that we are seeing today may very well have been avoided with proper loan planning from a mortgage consultant. My clients consistently comment that the most valuable part of the mortgage and home buying experience was our 60 minute Strategic Loan Planning meeting.
If you or someone you know is interested in refinancing or purchasing a home, please call and we can set up a Startegic Loan Planning meeting.
You can contact Richard at richard@gosfm.com, (602) 621-4667.
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