Today’s post is brought to you by one of our wonderful lenders – Aaron Staufer at Elevations Credit Union.
This year the Fed has cut rates not once but twice. The Fed Funds rate now sits in a range of 0 – .25%. So, what is the Feds Fund rate? What products does it impact? And how can you take advantage of it?
The Fed Funds rate is the rate that banks and credit unions lend one another money at. When the Fed cuts those rates you’ll see a fairly immediate impact on a number of portfolio loans such as Savings Deposits, Credit Cards, Car Loans, Personal Loans and 2nd Mortgages (like Home Equity Lines of Credit). Left off that list are 1st Mortgages. These are longer term loans that are based on the Mortgage Backed Securities Market.
Now buried in the Fed action from Sunday (3/15/2020) was the fact that the Fed is bringing back Quantitative Easing. Quantitative Easing is when the Fed buys various products as a way to buoy the markets. The Fed announced they will be buying $500 billion in Treasuries and $200 billion in Mortgage Backed Securities. When the Fed does this, it adds a huge player to the market and by buying up these investments it limits the supply which can increase the value. The Fed was doing a lot of this during the recession of 2008 which led to among other things mortgage rates being extremely low.
So why aren’t mortgage rates lower than they are? It’s a valid question as right now mortgage rates are arbitrarily high. Some of it has to do with a lender’s capacity. When rates dropped, they dropped abruptly and temporarily. The week of March 2nd was the single best week for interest rates in recent history. It was however followed by the single worst week for interest rates that we’ve ever seen. Rates don’t usually swing that much (literally changing .5% to .75% for certain products). Part of it is a capacity issue as some lenders simply ended up with more loans then they could process. The other part of it is lender’s being unsure of the markets. It’ll probably take market improvement for a sustained period of time before lender’s start to see the effect on their rate sheet and before it gets filtered down to you.
If you’re in the market for a mortgage be in contact with your lender and get your ducks in a row but also know that patience is key. If you’re in the market for any other loan products, then today is your lucky day as those rates have improved dramatically.