When the Federal Reserve Cut Interest Rates, What Does It Mean for You?

In the event of the coronavirus pandemic, the Federal Reserve just made a super-surprise move and cut rates to near zero. If you are considering a refinance or purchase, or maybe you even have to refinance based on your divorce decree, what does this move mean to you? From a practical perspective, the Federal Reserve cutting interest rates probably won’t mean much if you are considering a typical mortgage loan for the financing of your home.

Phone Calls and High Hopes

This comes as a huge surprise to many people.  Every time there is a rate cut, I receive a surge of calls from past clients and current clients. They inquire about the enhanced viability of a refinance or wanting a decrease in their rate equivalent to the Federal Reserve cut interest rates. Not that this is bad, I love hearing from my clients.  It is, however, a disappointment to many as they call with high hopes of a rate matching the newly determined Federal Funds Rate.

What is the Federal Funds Rate?

To understand this, you need to understand that there are short-term and long-term interest rates.  When the Federal Reserve cut interest rates, they are lowering the Federal Funds Rate. The Federal Funds Rate is used when banks and other depository institutions lend money to one another, usually on an overnight basis.  It is an extremely short-term.  It will influence things like Home Equity Lines of Credit and other shorter term borrowing products. However, it will not the 15-year loan or 30-year loan that people associate with the financing of a home.

So, the Federal Funds Rate is a rate and it does impact some lending, it is just not the interest rate that defines mortgage lending.  Mortgage rates are most correlated with the 10-year Treasury Rate.  This is a longer term rate and is a better indicator of trends for traditional mortgage products like the 15-year mortgage and the 30-year mortgage.

Staying Patient in this Changing Market

In this uncertain time with many things changing rapidly can and does impact people financially speaking.  I recently published an article, Follow Mortgage Interest Rate Trends. When’s the Best Deal?that can help with understanding the best strategy to deal with the changing of this market.  Additionally, I recommend using a professional to assist you. At SplitReady, we provide weekly guidance and daily rate information to all of our subscribers. We can help you be informed of changes in the market and how to manage transactions in the face of a fluid and ever changing market.

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