What Lower Interest Rates Mean for You

Last week the Federal reserve lowered interest rates. This has an impact on homeowners and homebuyers alike. What do lower interest rates mean for you? Read on to learn more!
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Recently the Fed lowered interest rates by a quarter of a point. This is the third time in a year that the Fed has made such a move, which is meant to boost the economy. There is a potential upside and a potential downside to this move for homeowners and homebuyers. The upside is that lower rates often result in cheaper loans. The downside is that in the event that the economy actually weakens, lenders will be more conservative with loans in that they will be less likely to offer a loan and may charge more for it to try to make up for their risk. This is according to Richard Barrington of MoneyRates.com.

Mortgages

Fixed Rate

There is a complex relationship between the Fed and mortgage rates. Several factors affect long-term fixed mortgage rates, including the economy, the Fed’s decisions, and inflation. “Fed rate cuts have very little direct correlation to long-term fixed mortgage rates. We have seen mortgage rates moving in the other direction of the rate cut or not moving at all in the past,” says Shashank Shekhar, CEO of Arcus Lending in San Jose, California

However, according to Tendayi Kapfidze of LendingTree, mortgage rates have been steadily going down for nearly a year. Bankrate states that the average 30-year fixed rate mortgage is now under 4%.

The deputy chief economist of CoreLogic, Ralph McLaughlin, said, “Mortgage rates this low at the end of an economic cycle is nearly unprecedented, and may be very well keeping the housing market — and U.S. economy — afloat,”

For homeowners, this makes it a good time to refinance their homes at a lower rate. Greg McBride, chief financial analyst at Bankrate, states that the average homeowner could save about $150 a month. ​

ARMs and HELOCs

On the other hand, there’s a clearer correlation between interest rate cuts and adjustable rate mortgages and home equity lines of credit. These financial instruments drop in price when the Fed lowers interest rates.

Homeowners with adjustable rate mortgages could expect to benefit by their rates dropping, although they may not see this right away because ARMs are only adjusted once a year.

Another benefit of the Fed’s recent rate cut for homeowners is that it will be less expensive for them to borrow money from a home equity line of credit or make payments on an existing HELOC. Since HELOCs can be adjusted within 60 days, borrowers will see more immediate benefits.

In short, homeowners and homebuyers are likely to both benefit from the recent drop in interest rates by the Fed in this market, but overall the Fed’s movements of interest rates affects different financial instruments differently.


Sources:https://www.cnbc.com/2019/10/30/heres-how-the-fed-rate-cut-affects-you.html
​https://www.bankrate.com/mortgages/federal-reserve-and-mortgage-rates/