The Federal Reserve reduced the Fed Funds rate yesterday by a quarter point. Wall Street responded with another volatile day of trading and the Dow lost 300 points because of unrealized expectations of an even larger drop in rates. 

The bigger question for homeowners and potential buyer’s is how this Fed funds rate drop effects mortgage rates.  Actually, mortgage rates follow the bond market, not the Fed funds rate. The interest rate on a 30 year fixed rate mortgage tracks the yield on the 10 year Treasury note.  Lenders typically set their base mortgage rate around two percentage points higher than the 10 year bond yield. Rates on adjustable rate mortgages are tied to yields on two, three, and five year Treasuries.  These short term loans are more sensitive to Fed rate movements, and those with the shortest maturities see the greatest impact when short term rates rise and fall.  So, if you want to know the direction of mortgage rates, you need to get a sense of where bond yields are heading.

Steve Siegel, Coldwell Banker
Email: steve.siegel@cbnorcal.com
mobile: 916.212.5066
www.teamstevehomes.com
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