B. Sorrentino

I recently was "scolded" by a client when I quoted her an interest rate on a 30 year mortgage from Washington Mutual this past Monday. She asked for another quote on the 30 year mortgage from Washington Mutual on Wednesday after the FED cut rates. I quoted her the exact same rate. She said, "WHY WOULD YOU QUOTE ME THE SAME RATE, AFTER THE FED JUST CUT .500??" She thought I was trying to pull something over. This is an educated business professional with a high net worth. So take it from me, EDUCATE YOUR CUSTOMERS PLEASE, AND AVOID CONFUSION :)

A Fed cut doesn't directly affect long term rates, but it does impact long term mortgage rates.

When the Fed cuts rates, it usually cuts the Fed Funds Rate, which is the rate banks lend each other money. However, when the Fed lowers the Fed Funds Rate, Prime Rate, the rate banks give their best customers, usually drops as well.

All this means that anything that has an interest rate tied to Prime is directly affected by the Feds' rate cut. Typically, these are short term loans. For instance, a credit card or a Home Equity Line of Credit (HELOC). In general, these rates drop when the Fed lowers rates.

Mortgages aren't directly affected because mortgage rates are typically longer term rates and are influenced by buyers and sellers in the bond market. Daily movements in the bond market cause mortgage rates to change. That's why you might get a quote from me on Tuesday, and on Wednesday, your quoted interest rate has increased .125%. The Fed lowers rates to help stimulate the economy. Ultimately a healthy economy is good for the real estate market. So, when the Fed lowers rates, indirectly it can help mortgage rates, but there is no direct correlation.

Another misconception is that mortgage rate changes occur in direct relation to when a Fed rate cut happens. In actuality, most mortgage rate changes, positive or negative, occur regardless of whether the Fed is actually meeting. That's because the mortgage market anticipates what the Fed is going to do.

BILLY SORRENTINO

The Prime Financial Group Inc.

Residential & Commercial Mortgages

REAL ESTATE INVESTOR