Fed Cuts Rates: How Will it Affect Home Mortgages?
The Federal Reserve cut interest rates again this week (by 0.75% this time) – so what does that mean for your home loan rates? Well, it may actually cause fixed rate mortgages to go up, but if you have an adjustable rate mortgage (ARM) you might see lowered loan rates as a result of the series of Fed cuts that began in September of 2007.
Because the Fed funds rate is more closely associated with the way adjustable rate mortgages are set up than fixed rate mortgages, homeowners with ARMs could experience a drop when their loan rates reset. The Fed cuts, which decreased the central bank’s benchmark rate from 5.25% to 2.25% since September, are expected to counteract loan resets that would have increased significantly (up 3% in some cases). Not all ARM borrowers will see a reduction in their rates, but the Fed’s actions should at least keep ARM rates where they are or permit just a slight rise.
Unlike fixed rate mortgages, adjustable rate mortgages automatically change without the borrower having to refinance. So, when interest rates decline the loan will recalculate and the homeowner will get a lowered mortgage rate. However, over time the rate can increase considerably, which means borrowers with ARMs could end up with larger monthly payments than they originally intended to cover.