Mortgage Rate Cut Truth

As most people now know, the Federal Reserve made an emergency rate reduction announcement. They have cut the Fed Funds and Discount Rates by .75% (or, as we call it, 75 basis points or 75 bps).

You will undoubtedly hear from so many people that the government "cut rates" today as if the government cut EVERY rate, everywhere, including Mortgage rates. That just isn't true.

It might help to know exactly what they cut and how, or if, that affects buying a home and the real estate industry.

The Fed Funds rate is the rate that depository institutions (i.e. Banks) lend to other depository institutions OVERNIGHT through the Federal Reserve system.

The Discount rate is for very short-term loans from the Federal Reserve
to depository institutions.

Both of these are the shortest term loans there are and they don't even
apply to consumers; just banks. These rate changes typically do affect
Prime Rate in lockstep which will affect your Home Equity Line of Credit, credit cards, and similar consumer type credit. They do NOT affect Mortgage rates directly.

Mortgages are the longest term loan you can get and they are impacted by the Bond Market and, ultimately, inflation. It is possible for the Fed rates to drop and the Mortgage rates to increase. In fact, Mortgage rates did increase slightly after the Fed announcement.

After the financial markets have time to digest all of what has happened and what THEY think it means, it will be interesting to see if Mortgage rates go up or down. It depends on whether they think this will solve the current housing and economic slump. If they think it will, which creates worries of inflation, then rates will increase. If they think that housing will continue to slump and the economy will contract and that there are no fears of inflation, then rates will come down. Don't be surprised if the rates go up!

You can argue what will help the market more; people happy about lower rates so they will buy, or worried that, if rates rise, they'll miss out on those "deals" so they better get into the market now. I personally think the lower rates only cause more buyer apathy and that we could
actually benefit from rising interest rates, but I know that's not a popular position. The truth is that the 1st time buyer in Ohio, the key to the Ohio
housing recovery, is so spoiled with Mortgage rates in the 5's, they think it's SUPPOSED to be this way. They do not appreciate the historic significance of the interest rates we're experiencing.

Ultimately, the only thing that will truly bring the nation out of the housing slump is confidence. Prospective buyers must have the confidence that their jobs are secure. They also need to know that homes are selling again in the Cleveland area so they need to jump in before housing values rise, too. I am very confident that, at least locally here in the Cleveland area and Ohio, we will see that occur in the second quarter. Ohio entered the housing slump in the 3rd quarter of '05 while the nation started theirs in the 2nd quarter of '07. So Ohio should be coming out before the rest of the nation. It's a great time to buy a home in the Cleveland area. There's plenty of homes to chose from and rates are amazingly low still. Now is the time to get a bargain not only on the home of your dreams but the loan of your dreams as well.

Jim C. Cook is an FHA, VA and mortgage specialist serving Ohio.

If you're interested in learning more about buying a home in this market or to start the process, Contact Ohio's best Realtors today and get the help and guidance needed to make the best financial investment of your life.