For the 7th time since last September, the Federal Reserve cut its target for the federal funds rate earlier this week. The rate, charged on overnight loans between banks, now stands at 2%, down a cumulative 3.25 percentage points in the last 8 months. The Fed simultaneously cut the discount rate, charged on direct loans to banks and securities dealers, from 2.5% to 2.25%.
What It Means For Mortgage Rates
Though there is no direct correlation between the fed funds rate and interest rates on mortgage loans, many investors look to the yield on 10 year treasury notes as a barometer for 30 year mortgage rates. While treasuries are considered "risk free," mortgage rates generally about 1.5% to 2.0% (150 to 200 basis points) higher than 10 year treasuries to compensate for the risk that a home loan will not be repaid.
With the 10 year yield now at 3.86%, rates on 30 year mortgage loans are right around 6%, certainly at the higher end of the historic margin range. This is an indication that buyers of mortgage backed securities are still somewhat risk averse, expecting higher inflation and/or more challenges in the real estate market.
But since most HELOCs (home equity lines of credit) and consumer rates (credit cards, etc.) directly track the prime rate, and the prime rate typically tracks the fed funds rate, expect to see some relief on these rates immediately.
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