- Benefits Of The Fed Rate Cut For The Housing Market And Borrowers
- Anticipation Of Lower Mortgage Rates
- Benefits Of The Fed Rate Cut: The Bottom Line
- What Does the Fed Rate Cut Mean for Real Estate Investors?
- The role of the Federal Reserve and Fed interest rate
- How the rate cut will affect new mortgages
- How the rate cut will affect refinancing
- How the rate cut will affect ARM and HELOC mortgages
- How the rate cut will affect real estate prices and returns
Benefits Of The Fed Rate Cut For The Housing Market And Borrowers
By Alex Carlucci Last updated Aug 18, 2020
“Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability,” the Federal Open Market Committee said in a statement. “In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 2 to 2.25 percent.”
After raising interest rates last year, economic growth has seen a slowdown. However, inflation remained the same. The U.S. Labor markets are still strong with historic record unemployment numbers.
Alex Carlucci further states:
The Federal Reserve Board’s concerns about our economic outlook and the long lag time between lowering rates and seeing effects in the real economy were key drivers of the decision of cutting interest rates.
Carlucci feels the interest rate cut on Wednesday, July 31st, 2019 will benefit mortgage borrowers. He strongly believes mortgage rates will drop in the coming months into 2020.
Anticipation Of Lower Mortgage Rates
Mortgage rates remained unchanged on Wednesday after the news of the 25 basis points rate cut.
- This is because the mortgage markets were already expecting the news by Fed Chairman Jerome Powell
- Further hints by Chairman Powell need to be leaked out about the Feds further decreasing interest rates for the mortgage markets to have an impact
Alex Carlucci said the following:
In order to see further declines in mortgage rates from this point, Chairman Jerome Powell would need to give clues about further potential cuts, which seems unly given the strength of the current data. Homebuyers can enjoy today’s low rates without fearing they’ll regret a purchase today because tomorrow’s rates will be lower.
Massimo Ressa, of GCA Mortgage Group., has conflicting views than Alex Carlucci’s. Massimo Ressa issued the following statement on Wednesday after the Fed Rate Cut Announcement:
From the perspective of real estate, if the Fed’s policy move has its intended consequence of boosting inflation and maintaining the expansion of the economy, we should actually expect to see mortgage rates increase.
A rise in mortgage rates could further impact an already slow housing market, as first-time homebuyers struggle with affordability. Increasing inflation and growth expectations will ly result in upward pressure on 10-year treasury yields after months of declines.
Mortgage rates remain low by historical standards but affordability remains a challenge, especially for first-time homebuyers in coastal markets.
Rising mortgage rates could put a damper on an already slowing housing market, but the continued expansion of the economy and incomes are going to be the real drivers of the market.
Benefits Of The Fed Rate Cut: The Bottom Line
Mortgage rates today are at a 3 year low. Back in 2013, rates on 30 year fixed rate mortgages were as low as 3.25%. Borrowers who closed on their mortgages in 2018 got rates at an all-time high since the 2008 Great Recession. The Federal Reserve Board increased rates four times in 2018.
Many borrowers closed their home loans at over 5%. Today’s mortgage rates are at 3.75% for prime borrowers without any Loan Level Pricing Adjustments (LLPA). Most borrowers who closed on their home loans in 2018 should get a net tangible benefit by refinancing their home loans today.
For more information about this article and/or other mortgage-related topics, please contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at email@example.com.
The Team at Gustan Cho Associates Mortgage Group is available 7 days a week, evenings, weekends, and holidays.
Alex Carlucci is an experienced private mortgage banker with Gustan Cho Associates. He has been in the mortgage industry for 20 years, and prides himself of his excellent customer service and communication.
Alex has extraordinary customer service throughout the whole loan process, and works very closely with each and every client to give them the best experience. Alex is very experienced and knowledgeable in Conventional, FHA, VA, and Jumbo loans.
He is also always up to date with all the constant changes in guidelines in the mortgage industry. Alex credits Finance of America's support team as a foundation for his success.
He has built a support team that has earned him an unmatched reputation for accessibility, communication and service to all parties involved in each and every loan.
What Does the Fed Rate Cut Mean for Real Estate Investors?
On Sunday, March 15, 2020, the Federal Reserve (the Fed) announced an emergency rate cut, lowering the Federal interest rate to between 0% and .25%. This sudden reduction in the Federal interest rate is an attempt to counteract the slowing of the economy, which recently came to a halt in an effort to stop the continued spread of the coronavirus.
This abrupt change in rates leaves consumers and real estate investors wondering how it will affect them.
The role of the Federal Reserve and Fed interest rate
Before you can understand how this rate cut will impact real estate investors in particular, you have to first understand what the Federal Reserve does.
The job of the Federal Open Market Committee (FOMC) is to establish policies that help govern and regulate the economy, including inflation rates, the supply of money, and economic growth and expansion, and define the cost of credit through the Federal rate.
The Federal base rate defines the cost for short-term borrowing in the financial market, particularly for banks and financial institutions borrowing and lending money to each other.
Ideally, a low Federal fund rate should promote financial institutions to continue operating as usual, borrowing and lending money freely.
It also should have a positive effect on the bond market, specifically 10-year Treasury bonds, which recently reached never before seen lows.
While the Federal interest rate does not define mortgage rates, it does impact them. Whether you're a real estate investor with a current mortgage or looking to get one, here's how the rate cut will affect you.
How the rate cut will affect new mortgages
Interest rates are still near historic lows overall, but over the past week mortgage rates have actually increased despite the Fed lowering the Federal interest rate to nearly 0%.
That's because the mortgage market doesn't mimic or match the Federal base rate but closely relates to Treasury yields, which saw a recent surge after the Fed announced their plan for quantitative easing.
Those seeking a new mortgage can lock in a relatively low rate now or wait it out to see whether rates will lower in the coming weeks as mortgage applications slow and the true effects of the coronavirus are better understood.
How the rate cut will affect refinancing
Since the Federal rate cut was announced, applications to refinance rose 4% in just one week's time. The surge in new refinance applications has been another factor motivating banks to increase mortgage rates slightly for the time being.
Refinancing at the current rates may make sense for real estate investors with higher interest rate loans; however, the cost and fees associated with a formal refinance may not justify it. Lenders and banks seem very receptive and understanding of the current crisis and are open to working with borrowers to reduce the lihood of defaults in the future.
Right now may be a good time to reach out to your lender to see if there is an alternative option outside of a formal refinance to lower your current loan rate.
Rob Arnold, a real estate investor and broker at Sand Dollar Realty in Central Florida, contacted his bank this past week, and after talking with his lender, they agreed to rewrite the loan terms on two of his rental properties to a fixed rate of 4%.
This helped him avoid having to pay closing costs or loan origination fees while securing a much lower rate than his original mortgage.
How the rate cut will affect ARM and HELOC mortgages
Adjustable-rate mortgages (ARM) and home equity lines of credit (HELOCs) will see a slightly lower interest rate immediately because they are tied to the prime rate, which is directly related to the Federal fund rate. So when the Fed rate is lowered, any borrowers with an ARM or HELOC mortgage should see some savings.
How the rate cut will affect real estate prices and returns
Typically, the lower the interest rate the more incentive there is to borrow money, thus promoting purchasing and spending. This would normally stimulate an economy and promote buying, pushing real estate prices higher. However, today's crisis and the outcome of the Fed rate cut may not produce a normal outcome.
Things are still very uncertain in the market. Each day is bringing new policies and changes to the financial market and operation of the economy. While the Fed's emergency cut desires to stimulate the economy, real estate activity has slowed in many places, and the number of default rates on investment properties, loans, rent, and mortgages is still unknown.
Only time will tell how this will play out in the long run, but for now, it's ly we'll continue to see mortgage rates stay around or just below 4%, and we'll see a relatively flat real estate market.
Over the next few weeks and months, it's ly mortgage rates will go lower. However, if defaults increase and banks become strapped for money, we could see an increase in mortgage rates as a means to try and recoup their losses.
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