Getting the Cut Right
This is going to be a short one, I assure you. This is probably stuff you already know, but I think now’s a good time to bring it back up and have a bit of a refresher course. Are you ready?
When people talk about The Fed and “rates”, they’re not talking about home mortgage interest rates . . . at all. They’re talking about the “Overnight Lending Rate” – this is the rate at which banks borrow money from each other – and it’s a short-term rate. Mortgage rates, by their very nature, are long-term rates. Are you still with me?
The Fed cuts rates to fuel economic growth and/or allow inflation to rise. While that’s great for our 401Ks and the like, those things are bad for long-term rates like the ones we seek for home loans. Conversely, when we have trade tensions and other global concerns, people get nervous so economic growth stalls and inflation stagnates.
In coming days, if The Fed chooses to HELP the stock market by cutting rates, we’ll have to wait and see what the market’s reaction does to the long-term rates. Put simply: anything that helps stocks is usually not a help for long-term mortgage rates.
Have I oversimplified it? Of course I have! However, when you hear two guys at the barbershop (if such a place even still exists) having a chinwag about what the talking head on TV just said about The Fed raising or cutting rates, you’ll be smarter than 95% of the population and know where mortgage rates are headed. Don’t let that go to your head, though – it might make it difficult for the barber to give you a proper cut.