Most mortgage rates, whether they be fixed or adjustable, are not tied to the fed funds rate, the prime rate, or treasuries of any term.

Many times when the fed raises or lowers “rates”, mortgage rated do the exact opposite.

Remember, It is the reason behind the raising or lowering of “rates” by the Federal Reserve that influence mortgage rates, not the actual raising or lowering.

Mortgage rates are tied to their underlying investments, which are Mortgage Backed Securities, or MBS. The securities trade on the open marke, like stock or bonds. Sometimes MBS follow treasuries, sometimes not. It is coincidence if they track each other, not a requirement.

MBS use the mortgaged property as their collateral. Treasuries are backed by the US government. MBS are not. Therefore, Treasuries are considered less risky than MBS

Some mortgages, namely Home Equity Lines of Credit (HELOCS) are tied to the prime rate, which is in fact set by banks, not the Fed. The prime rate is typically 3% higher than the fed funds rate, which is the banks overnight lending rate (the rate they lend each other money)

Therefore, banks like to make about 3% profit spread between what they borrow the money at, and what they lend the money at.

So, Essentially, Mortgage rates are dictated by the economy and it;s future direction. The worse the outlook, in general the better the rate. Inflation, however, will kill rates. The higher inflation looks to get, the worse (higher) mortgage rates will get.

It is a tricky business.

Terry

Jeff, Pam, and Lily are wrong in claiming mortgage rates are tied to the 10-year note/Treasuries. That is a common misconception, even among mortgage professionals. Rates are derived from mortgage backed securities (mortgage bonds), namely the Fannie Mae bonds. While rates do tend to track similarly to the 10-year note, many times they move opposite.

Furthermore, ARMs that are about to adjust may be affected by the rate cut. The reason is that the Fed’s move indirectly affects LIBOR which many rates are based on. To determine your ARM’s fully indexed rate, simply add LIBOR (or whatever else your index is based on) and the margin.

If you would like to see what is happening in the mortgage bond market and where rates are headed, I run a blog off my main site, called Florida Mortgage Daily.

For general mortgage planning advice, news, and more, please visit Florida Mortgage Report.

Not only are you corret but when money is cheap it creates a mirage of higher returns that wouldn’t be there under normal market conditions. So when the working Joe sees his neighbor getting 50% returns in the equity markets he dives in to reap the benefits. There then becomes a false sense of prosperity because as soon as the Fed tightens the reigns the mirage clears up and … uh ohhhh, there goes your life savings (see dot com bubble).

The stock market then starts to stumble, the government cries foul and passes the “impossible to comply with” Sarbanes Oxley act. The Fed then cuts interest rates again to stave off a recession. Money becomes easy again and people say “fuck NASDAQ this time, I’m going to be sensible and purchase the American dream… a house. Not only does your neighbor think this is a good idea, the Prez thinks it’s a great idea too (search homeownership 2000-2003 news articles). The working Joe who lost his life savings to speculative investments and is currently renting sees his neighbor buy a house so he takes the plunge. Even though he has questionable credit there seems to be a million mortgage banks willing to give him a mortgage so he takes out a $300,000 adjustable rate mortgage and his payment is only ten bucks more than his rent.
“Man this American Dream shit is great” he says.

Two years later his mortgage bank comes knocking and says “Check it out, sucka! The Fed be fearing inflation and bumped the interest rates up so your payment is now going to go up 500 bucks a month. I know you can’t pay it because the other broke muthas on your block can’t pay either. I personally don’t give a shit because Bank of America, Fannie Mae and this crazy foreign dude who calls himself Hedge Fund bought all my shitty mortgages last year. I’m just here to tell you we’re taking your house so get out.

Again the Gubment cries foul and proposes to bail out shady lenders. Not only that but they plan on cutting interest rates again to stave off recession.

Poor Joe..he lost his life savings and his house. How come when he was deep in prosperity he didn’t hear a damn thing about shady mortgages or shady accounting but as soon as the Fed raises the interest rates and prosperity is gone the government comes to save the day with bail outs and business killing regulations?

The moral of this long rant is buy gold and vote for Ron Paul.

I don’t (and AFAIK economists don’t either) believe that low rates encourage spending. Around 70% of the economy is fueled by people with 100% propensity to consume – those that live paycheck to paycheck. They weren’t saving anyway.

In economic theory, what the rate cut will do is (hopefully) encourage companies to expand – and hiring, thus improving the economy. It could also kick up inflation – and it just might considering the rising price of food and energy.

I don’t claim to be an expert about this, but isn’t this something that Bernake should be worried about just as much as the stock market?

My mortgage is at 6.675%, but I only have 5 years left on it, so refinancing isn’t a good idea. As Rick said, the closing costs would eat my profits.

One thing I might look into, though. I really want to do some renovations on my house. After getting it inspected again to see what needs fixing I’d like to hire an architect to make some plans. Originally I wanted to ask for a 10- or 20-year plan, where I make changes as I can afford them. But maybe I should check into the various home improvement loan options (HELOC, refinancing a larger amount, etc.) because folks doing renovations usually have trouble getting business during recessions. Maybe now’s a good time to get some work done cheaply, even if you don’t have the money, because interest rates might be so low that you still come out ahead.

Or maybe I’m just rationalizing.

Above commenters are right that mortgages are not directly affected by rate cuts. Most mortgages are tied to 10-year Treasuries; rates there are most directly affected by trades in the bond market and only indirectly by Fed monetary policy.

Moreover, most subprime mortgages are tied to Libor, which is even less directly linked to Fed monetary policy because it’s not a US benchmark.

I have a more long-winded explanation of the rate cut’s impact at my blog.