Does the Federal Reserve Set Mortgage Interest Rates?

The Federal Reserve has cut interest rates seven times since last September of 2007 for a total reduction of 3.25% points; however, interest rates on mortgage loans have actually gone up since that time. Many homeowners have asked why the reduction has lowered some interest rates but hasn't led to a drop in mortgage rates. In fact, the Federal interest rate cut may or may not lead to a lower mortgage interest rate for consumers.

The Federal Reserve Does Not Control or Calculate Mortgage Interest Rates

Mortgage interest rates are not set by the Federal Reserve. The Federal Reserve's sole is to keep our nation from financial collapse by regulating our financial institutions and determining monetary policy. The Federal Reserve influences inflation through the discount rate which is the interest rate a regional U.S. Federal Reserve bank charges depositories (banks, savings and loans, and credit unions) when they are short on reserves and the Federal Funds rate which is the interest rate that banks charge each other for overnight loans. The Federal Funds rate is the rate that affects consumer loans including credit cards, car loans, and home equity mortgages. The sub-prime mortgage crisis left our financial institutions short on cash; mortgage-backed securities were not selling and banks became hesitant to take on mortgage securities as collateral. The Federal Reserve, therefore, lowered interest rates to keep our financial institutions moving forward.

Who or What Does Control Mortgage Interest Rates?

In a nutshell: Wall Street. Mortgage interest rates are determined by the trading activity of mortgage-backed securities. Mortgage loans are bundled and sold by investors, then split into other units such as bonds, which can be bought and sold. It is the performance of these bonds that dictates mortgage interest rates -- not the Federal Reserve. Mortgage backed securities are subject to supply and demand, economic news, political events, inflationary pressures, and any number of events that affect our economy. While there have been numerous attempts in the past year to try and keep interest rates down, investors are still gun-shy.

There is no magic mortgage calculator that can help you determine where interest rates may be in the future. Your best bet when looking for a new mortgage is to speak to a professional loan officer. Make sure that he or she is licensed and has a solid reputation; and always get a Good Faith Estimate and a Truth in Lending Disclosure before committing to your new home loan.

Posted By :
Sheryl Landrum is a Loan Officer in San Diego, California and a freelance writer specializing in mortgage issues.

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