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Signs of Change
By Tracy Dickinson
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Signs of Change

Do lower Fed rates signal a drop in mortgage rates?

When the Federal Reserve announced in July that it would drop interest rates a quarter of a percent, many consumers assumed lower mortgage rates would follow. Coincidentally, mortgage rates have fallen since the latest Fed meeting, helping to create excellent mortgage options with the current rate environment. But that isn’t always the case.

“Before the Fed lowered rates, we’d already seen a decrease in rates almost back to all-time lows. I really never thought I’d see rates this low again in my career,” says Kim Downing-Manning of Bankers Trust.

Green State Credit Union’s Patrick St. John says, “A lot of people assume the Fed rate has a direct and immediate effect on mortgage rates, which isn’t necessarily true. Mortgage rates are tied to long-term bond and treasury markets.”

“The Fed doesn’t have a direct effect on mortgage rates. Market reaction to the Fed does,” Downing-Manning says.

As usually happens, the market responded positively after the Fed announcement. In fact, St. John says both bonds and stocks are trading at all-time highs, which is a little unusual. “Typically, those markets work inversely. When one is down the other is up. There are a lot of unique things in the market right now like that, and that makes it almost impossible to predict how rates are going to change.”

Both St. John and Downing-Manning offer some advice for homeowners for dealing with this unusual economy.

Pay attention to the financial news

“Things like trade talks and tariffs have an immediate effect on the market, and mortgage rates follow,” says St. John. He says this summer’s interest rate change had less influence on mortgage rates than the news of President Trump’s tariff battle with China.

Being aware of financial issues like this can help prepare you for fluctuations in mortgage rates so you can make adjustments to your advantage.

Know when to refinance

Although many factors will play into this decision, Downing-Manning suggests, “Any homeowner paying 4% or more in interest right now should look into refinancing.”

Because rates are significantly lower than they’ve been in the past 24 months, homeowners who bought more than two years ago may well benefit from refinancing already. “There are costs involved in refinancing, of course,” says Downing-Manning. “But if the difference in payment is enough to recoup your costs, it may be worthwhile.”

Some experts recommend refinancing if rates are more than 1% lower than your current rate. If your current loan is an adjustable rate (ARM), locking in a low rate can also make sense.

“Normally, there’s quite a variance between ARM rates and fixed,” Downing-Manning says. “But we have a pretty flat curve right now. Without that spread, ARMs aren’t as attractive to most homeowners unless they’re more transit and know they won’t be staying in the home long.”

St. John says, “There’s no general number or rule that can determine for every homeowner when it’s the right time to refinance. Watching the market and asking the right questions can help. What’s the interest rate now? How long are you staying in your home? These are some of the questions to ask.”

Contact a trusted professional

There are indications like the historically low interest rates we’re seeing now that it’s worth having a conversation with your lender. And that conversation is the key.

“Every homeowner’s situation is unique. That needs to be evaluated individually with a professional that can help you look at all the options available,” says Downing-Manning.

St. John agrees. “There are so many products and options that there’s no standard approach to mortgage lending and refinancing. Homeowners are better off talking to a professional that can match the mortgage product to their individual needs and their financial plan.”

Factors such as your current rate, the years remaining on your mortgage, the length of time you plan to stay in your home, and the amount of equity available can all play into that decision. And choices such as refinancing for a shorter term, opting for a home equity loan rather than a traditional mortgage, and considering an adjustable rate mortgage are all options your lender can help you weigh.

The lower Fed rate may not lead to dropping mortgage rates, but it can still serve as a signal for homeowners. Changes that begin with the Fed often start a chain of events throughout the financial market that can cause fluctuations in mortgage rates as well.


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