Federal Funds Rate (Blue) vs Fixed Rate Mortgages (RED): Many believe that lower Federal Funds Rates

will reduce mortgage rates or lower mortgage rates stimulate sales. This can be true, but there is a disconnect. Long term rates (e.g., 30 year fixed) are mostly tied to the 10 year treasury yield (determined by bond traders). Inflation drives long term mortgage rates. When bond traders demand higher long term rates — that drives up long term mortgage rates. There is a correlation between the Federal Funds Rate and short term mortgages (e.g., adjustable rate mortgages or ARMS). DEFINITIONS: Federal Funds Rate: This is the RATE at which banks lend immediately available funds (balances held at the Federal Reserve) to another bank overnight. Decreases in federal funds interest rates stimulate economic growth. An excessive high level of economic activity CAN cause inflation pressures to build to a point that it will undermine the sustainability of an economic expansion. An increase in the federal funds interest rate will curb economic growth and help contain inflation pressures, This would promote the sustainability of an economic expansion. Yet, too large an increase could retard economic growth. 30 year FRM (fixed rate conventional mortgage): The interest rate remains fixed (e.g., 15 and 30 year FRM) during the period of the loan — 75% of home mortgages are fixed interest rate loans.

Bruce W. McKinnon, MBA
Associate Broker


Windermere Real Estate / GH LLC 12003 Mukilteo Speedway, Suite 101 Mukilteo, Washington 98275 — Where Eagles Fly & Ships Go By —

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