Fed Reservse rate slashes and the current mortgage rates?

ohioan_femme asked:


Today, Federal Reserve slashes benchmark interest rate to between 0.25 and zero percent. What the heck does that mean? And how come no matter how many times the Fed slash the rate, it barely affects the 15-year and 30-year mortgage interest rates? Does it have something to do with the housing demand? Isn’t the housing industry in the pits now? How come the rates are not going down? Can anyone explain this to me in layman’s language?

Thank you.

Marilyn

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3 Responses to “Fed Reservse rate slashes and the current mortgage rates?”

1. Sidney L Says:
   May 27th, 2009 at 3:58 pm

   Edwin

   The rate is going down, but very slowly. When we purchased our home the feds slashed the rates so we ended up with 6.5 instead of 7.0. It doesn’t seem like alot, but it really is once you add up the savings over 30 years.

2. HelpMeEscrowStuff Says:
   May 28th, 2009 at 5:15 am

   Michael

   The fed reserve rate is the rate at which it (and other banks) lend money to other banks via “ovn’t loans.” Theoretically interest rates are supposed to fall for mortgages but as you’ve seen, this hasn’t really been happening. The reason for this is that virtually NO ONE is loaning out $$ to potential homebuyers during this credit crunch. Basically, banks are afraid to loan money. They’re losing $$ hand over fist right now on people who foreclose due to non payment so the rate they charge has to compensate somewhat for the risk they’re taking. Until the “Risk” factor disappears, the rates will continue to be in the 5-7% range - possibly higher. When the FED basically backed Fannie Mae/Freddie Mac’s mortgages, the “risk” was substantially lowered and the rates fell from about 6.5% to 5.5%, pretty drastic.

   So, while the latest rate lowers the federal funds rate to effectively 0.00 or 0.25%, it will do nothing for the mortgage market until people believe the “risk” factor is lowered too.

   I would expect to see mortgage rates hover between 4.5-5.5% for the next few months and see how foreclosures do. If they start to drop, then interest rates will drop along with it.

3. Frog Says:
   May 31st, 2009 at 12:46 pm

   Frederick

   I asked the same question to my mortgage company. I am on a arm and I thought my rates should go down but they went up. Well, they told me that the rates the feds cut is the rate they the Feds lend money to the banks at. Its not what the banks lend mortgage loans at. The way I understand it is, the banks borrow the money form Uncle Sam for next to nothing and then make a profit by lending it to the homeowners by charging extra rates. I don’t think we will ever see mortgage rates go much lower than they are now, the banks would never make any money.