Fed Cuts Don't Mean Lower Mortgage Rates

Some may have a perception that when the Fed meets and lowers interest rates, then that means mortgage interest rates are going to go down too. However when you look at the dynamics of our economy you see this is not always the case.

A good example is the recent cuts that the Fed has announced in recent months. The last cut was a whopping 3/4 point, but as we see this did not cause mortgage interest rates to go down...in fact they went up. Just a month or so ago the 30 year fixed interest rate was around 5 3/8%, now it's about a full percentage point higher...which is a HUGE swing. To put it plain and simple, Fed rate cuts actually hurt mortgage interest rates much of the time.

Whats happening is that when the Fed lowers the prime rate, this causes the phenomenon of inflation to increace, which means the dollar is worth less. When this happens, it actually makes the financial institutions worried instead of relieved because they see inflation as a risk factor, and increased risk is what drives the financial institutions to raise the rates on their products. This is evidenced in recent months by what we have been seeing, there have been several large Fed cuts recently, but mortgage rates have actually went up.

So what does this mean to you? One of the most important things that it proves is that waiting for rates to go down because you anticipate the Fed cutting interest rates is not a great idea. In most cases, you would do better to buy a home BEFORE rates are cut, because chances are when the cut happens, then mortgage interest rates (the rate that matters when buying a home) could be going up.... not down.

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