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Fed Funds Rates vs. Mortgage Rates

The Federal Reserve recently announced that it intended to keep “interest rates” low through at least mid-2013. This unprecedented statement shocked the markets and helped drive mortgage rates down to match historic lows. As investors digested this information, many concluded the Fed is essentially stating that they believe our economic growth will remain stagnant for some time. Although the markets appreciated the transparency of the Fed’s statement and assurance that lending rates will remain low, it was a sharp contrast to prior predictions that our economy would be at a healthy growth rate by the end of 2011. The acknowledgement that our economic recovery has been “significantly slower” in the first half of 2011 than previously expected was more in line with what many on “Main Street” have been saying all along.

How Will this Decision Impact mortgage Rates?

There are two interest rates that are controlled by the Federal Reserve – the Fed Funds Rate (a lending rate at which banks with deposits at the Federal Reserve lend money to other banks overnight) and the Discount Rate (the interest rate that an eligible depository institution is charged to borrow short-term funds directly from a Federal Reserve Bank). Both of these are very different from mortgage rates. A mortgage rate can be in effect for 30 years while a rate set by the Fed can change from one day to another. Therefore, this recent statement by the Fed does not guarantee thatmortgage rates will stay in current ranges until mid-2013, only that it is likely short term rates will remain at current levels for the next two years (home equity rates, car loan rates, credit card rates, etc.).

One of the greatest determining factors in the direction of mortgage interest rates is the rate of inflation. Being thatmortgage rates are set based on the price of a mortgage backed security (a bond sold to investors that is backed bymortgage notes), inflation is the arch enemy of any type of fixed income note or bond. Therefore, as inflation increases, mortgage rates will move higher regardless of how low short term interest rate are. In fact, if the Fed continues to hold short term interest rates low in the face of inflation, mortgage rates will increase further. A failure to increase short term rates in an inflationary environment will be viewed as a lack of effort by the Fed to fend off inflation, and long term rates will be the victim.

What Action Should Each Homeowner Take?

One primary benefit of the current low interest rate environment is the opportunity for homeowners to reduce the interest rate they pay on their mortgage. If you have a mortgage, or any other consumer debts, now is the time to have your mortgage reviewed by a professional who can advise you on the opportunities and determine if you should make a change to your home loan. If it is a wise decision, be mindful of the expenses to do the loan and the amount that most lenders add to your principal balance to Refinance your mortgage. Any time a no-fee loan is available, that is likely the best solution to consider. Most of the loans we structure do not have any closing costs paid by the borrower and do not increase the principal balance of the mortgage. Our goal is to have homeowners reduce their mortgageliabilities, not add more to their balance. If you have any questions, or if you would like a no-cost mortgage review, call me at 801-501-7950 or e-mail me at

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