How is the Fed helping?

So the Fed decided to drop interest rates a .5%!? Should we start to get excited?? Probably not too excited, but it's moving interest rates in the right direction for consumers. The Fed's action represents their concern for the real estate and mortgage markets around the country.

So how does the system work?

The Federal Reserve's interest rate represents that cost of lending money for banks. For example, if the Federal Reserve's interest rate is 5%, it costs banks 5% for any money borrowed. Because banks are in the business of making money, they add their margin on top of the Fed's rate and then offer that combined rate to the consumer. In this example, if the Bank's margin was 2.5%, they would be offering mortgages at 7.5% to the consumer.

So when the Federal Reserve says they are lowering interest rates, it is saving banks money. While it seems like this savings should be reflected to the consumer, this may take a while, depending on each banks situation. If the bank has remained conservative and didn't have too many high risk loans in their portfolio, they might be able to give consumers a break sooner then later. The key here is that the banks should be able to recover some of the their losses and therefore help out their consumers in the long run.

Will we see any immediate changes?

If you have a floating rate on a Home Equity Line of Credit, and the rate is based off an index that is directly effected by the Fed's rate, your rate should have adjusted. Otherwise, mortgage rates seem to be pretty steady at this point. If the Fed continues to drop rates, we'll see a more direct effect on mortgage rates.



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