Every one assumes that when the Fed raises interest rates mortgage rates automatically go up. So The Fed is called the villain in a housing slow down. But is this really true?
Let's start with what's what. The fed funds rate is the interest rate that banks charge each other when borrowing money. This is usually over night. The Fed sets a rate to borrow from it. That translates to what baks can charge each other. You may think that banks borrow from the Fed. But the Fed. is a lender of last resort. Why? Because if you borrow from the Fed too often the Federal Reserve has the right to audit you. Banks borrow from each other when their position vis a vis assets and liabilities are out of whack at the end of the day. So think about this if you are selling funds you can charge this interest rate. So shouldn't you LOWER your mortgage rate as you are making money!!! Fun stuff isn't it. Well with very few exceptions today's seller could be tomorrows borrower. But other than raise the general price of borrowing money the fed funds rate really has no direct tie to Mortgage rates.
What does the fed funds rate tie to ? It has a direct tie to the prime interest rate. The prime interest rate is the rate Banks loan, usually short term, to their best customers. Unless your name is Apple or GM you usually don't get a prime rate. The prime rate is generally speaking 3 points over the fed fund rate. So if the fed raises rates from 1 to 2 percent in a year then prime usually follows from 4 to 5 percent. This is how the fed works to slow a potentially over heating economy.
What does effect Mortgage rate ? The bond market. But that is a whole different subject for another blog. So if someone tells you that darn fed raised rates and my mortgage rates will now go up , it is not necessarily true. In fact during the rate hike we have seen there have been a couple of times Mortgage rates actually went down.
What is true is that if you looking to buy sell or invest in our North Georgia Mountains visit us www.allmountainrealty.com.
We will work with you to help you find the best value for your money no matter what the interest rate.