The Federal Reserve made another emergency rate cut of 1% — bringing the Federal Funds Rate down to 0% — to combat COVID19 (Coronavirus) and its effects on the US economy and the stock market.
The Fed Funds Rate is primarily tied to consumer loans such as automobile loans, credit cards, appliances, and similar types of financing. The Fed Funds Rate, which largely determines the Prime Rate, is NOT directly tied to long-term mortgage rates.
Mortgages that are directly affected by this cut are loans tied to the Prime Rate (some ARM’s that are variable rates).
Most variable and short-term rates are linked to two benchmark rates: The Prime Rate or the London Interbank Offered Rate (LIBOR) plus a margin, which is a number of percentage points. These rates usually march in step with the Federal Funds Rate, so rate cuts mean additional savings for some borrowers that are in the variable rate adjustment period of their mortgage.
Variable rates usually move in the same direction as the Fed Funds Rate. The Fed Funds rate, however, doesn’t directly affect long-term rates, which include financial products like 30-year fixed-rate mortgages; those tend to move with long-term (10-year) Treasury yields.
Some mortgages also can be indirectly affected by the Fed Funds Rate. Some mortgage lenders will lower their long-term rates, while some may raise them, based upon their outlook on the long-term strength of the economy.
The good news is that housing fundamentals are staying strong,[1] even amidst the recent stock market volatility. The Fed has promised to purchase at least $700 billion in bonds and mortgage backed securities to further combat the effects of COVID19 on the US economy.
Bottom Line – This is a GREAT time for real estate professionals and investors, because most Americans will want to invest in tangible assets such as real property, especially considering the stock market volatility coupled with historically low mortgage interest rates.
