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Mortgage Rates
By Ray LaGrange 6 months ago
One of the biggest misconceptions about mortgage rates is the impact that changes in the Federal Reserve rate (Fed rate) has on 30 year fixed rate mortgages. In reality, there is no correlation.
Let’s begin with an understanding of what the Fed rate is. The Fed rate is the interest rate that the Federal Reserve charges banks when banks borrow money from the Federal Reserve. By law, banks must keep a required amount of cash on hand at all times. If the bank runs low, they borrow from the Federal Reserve. This is basically an overnight borrowing rate.
Another commonly heard rate is the prime rate. This is the rate that banks charge their very best customers for short term borrowing. As a general rule the prime rate tracks the Fed rate.
Another rate is the US Treasury Bill rate or T-Bill rate. Whenever the federal government needs money on which to operate, the government issues treasury bills which are set to mature in 10 years and have a fixed rate of interest. T-Bills are considered by investors to be very secure since they are backed by the US Government.
The 30 year mortgage interest rates are based on the 10 year T-Bill interest rate. Statistics show that on the average homeowners sell their home within 5 to 7 years after purchasing. The T-Bill and the mortgage have similar life times and are both sold to the same large pool of investors. Very, very few mortgages are held by the originating entity. Banks, mortgage banks, mortgage brokers all resell their loans to a pool of investors.
In the first half of 2004 the Fed rate was at 1% and in July of 2004 it started climbing until it reached 5% in July of 2006. It remained at 5% until July of 2007 and then started dropping until it reached the current rate of 2%. The Fed rate went up 4 percentage points and then dropped 3 percentage points which shows a great deal of fluctuation. On the other hand 30 year mortgage rates have fluctuated between about 5.5% and 6.5% which is considered to be relatively stable.
Regardless of what is reported by the media or advertised by various lending institutions to get you to call, mortgage rates have been and continue to be relatively stable and very affordable.
Email Ray with questions or comments at moneypeteray@gmail.com
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