FED Cuts Rates - What does that mean? Refinance now or wait?
News headlines are all over the place mentioning the FOMC cutting the Fed Funds Rate by 50bps-1-1.25%. Another Fed announcement just came in that they will be reducing it again another .25 basis points. Are interest rates lower? Abso-freaking-lutely! Am I personally considering refinancing my 4.375 30yr fixed? I sure am!
I thought a message from my secondary market desk would help clarify what’s going on, and if you’re curious about the market, read on.
“This does not mean that mortgage rates dropped 50bps, nor did they drop to rates of 1-1.25%. The Fed Funds Rate is the rate at which banks lend money out to each other on an overnight basis. Yes, these rate changes by the Fed usually have an effect on more short-term rates like auto loans, or credit cards, but it is not an immediate effect on mortgage rates. The changes/cuts will eventually seep through to mortgage rates in some form, but what is ultimately driving rates down right now is the continued flight to quality rally into Treasuries. What does that mean? When there is a global phenomenon, one that is filled with uncertainty just like the virus, investors will sell stocks and put their money into Treasuries on fears that we will see an economic slowdown, thus reducing the value of their investments. Treasuries are a ‘safe haven’ asset and the most-liquid asset in the world. Investors will park their money here given the fixed duration, call it risk-free, and one that is backed by the full faith and credit of the U.S. govt.
The 10yr is closely correlated to mortgage rates as the average life of a 30yr fixed loan is 7-8 years. That said, it is not a direct correlation, and thus, there is always a spread between the 10yr and MBS pricing. Putting this into context, it means that the move lower in the 10yr is bringing mortgage rates along for the ride, but not at the same pace. That is when we mention the ‘lag’ or ‘underperforming’ in our commentary. There are usually two reasons for this, one being volatility, the other being prepay risk. For the most part, one affects the other. Bottom line, until the volatility of the market rests and we see some extended time spent at these lower levels on the 10yr, MBS pricing and mortgage rates will be slower to catch up.”
Now with the above being said, mortgage backed securities will continue to lag with this catch-up game we’re playing but at the same time the market is extremely volatile and taking advantage of the pricing we have today is definitely something to consider. Refinance volume is up 225% from the same time last year and rates are as low as they were more than 8+ years ago.
Don’t want to gamble but still want to benefit? We have what’s called a float down option here at PrimeLending, if rates improve after we lock - we can float down to the better rate. Don’t risk it and be protected. Give me a call (619) 379-8999 and/or e-mail at [email protected].
News headlines are all over the place mentioning the FOMC cutting the Fed Funds Rate by 50bps-1-1.25%. Another Fed announcement just came in that they will be reducing it again another .25 basis points. Are interest rates lower? Abso-freaking-lutely! Am I personally considering refinancing my 4.375 30yr fixed? I sure am!
I thought a message from my secondary market desk would help clarify what’s going on, and if you’re curious about the market, read on.
“This does not mean that mortgage rates dropped 50bps, nor did they drop to rates of 1-1.25%. The Fed Funds Rate is the rate at which banks lend money out to each other on an overnight basis. Yes, these rate changes by the Fed usually have an effect on more short-term rates like auto loans, or credit cards, but it is not an immediate effect on mortgage rates. The changes/cuts will eventually seep through to mortgage rates in some form, but what is ultimately driving rates down right now is the continued flight to quality rally into Treasuries. What does that mean? When there is a global phenomenon, one that is filled with uncertainty just like the virus, investors will sell stocks and put their money into Treasuries on fears that we will see an economic slowdown, thus reducing the value of their investments. Treasuries are a ‘safe haven’ asset and the most-liquid asset in the world. Investors will park their money here given the fixed duration, call it risk-free, and one that is backed by the full faith and credit of the U.S. govt.
The 10yr is closely correlated to mortgage rates as the average life of a 30yr fixed loan is 7-8 years. That said, it is not a direct correlation, and thus, there is always a spread between the 10yr and MBS pricing. Putting this into context, it means that the move lower in the 10yr is bringing mortgage rates along for the ride, but not at the same pace. That is when we mention the ‘lag’ or ‘underperforming’ in our commentary. There are usually two reasons for this, one being volatility, the other being prepay risk. For the most part, one affects the other. Bottom line, until the volatility of the market rests and we see some extended time spent at these lower levels on the 10yr, MBS pricing and mortgage rates will be slower to catch up.”
Now with the above being said, mortgage backed securities will continue to lag with this catch-up game we’re playing but at the same time the market is extremely volatile and taking advantage of the pricing we have today is definitely something to consider. Refinance volume is up 225% from the same time last year and rates are as low as they were more than 8+ years ago.
Don’t want to gamble but still want to benefit? We have what’s called a float down option here at PrimeLending, if rates improve after we lock - we can float down to the better rate. Don’t risk it and be protected. Give me a call (619) 379-8999 and/or e-mail at [email protected].