01.30.08

Lower Fed Rate Helps Mortgage Refinancing

Posted in Advice - Refinance at 10:10 pm by Ken S.

Lower Fed Rate Helps Mortgage Refinancing - For the second time this week, the Federal Reserve reduced the federal funds rate by one-half point.  This lower Fed rate helps mortgage refinancing.  How?  Here it is in a nutshell.

Think of money as an entity.  It moves in, out, and around the economy constantly through purchases, returns, loans, investments, payments, re-payments, etc.  At any given moment, hundreds of millions of people around the world are moving money around.  To keep up with this movement, banks lend and borrow money, to and from each other, on a short term basis (usually overnight).  The Federal funds rate is the interest rate the banks charge each other when they lend money to each other.  Today, that interest rate is 3%.

So, the lower Fed rate helps mortgage refinancing like this:  After the interest rate banks will charge each other is established, the banks establish the lowest rate they are going to charge to qualifying consumers and businesses.  This rate is called the prime lending rate, the benchmark rate for consumer and business loans.  When the Fed funds rate was lowered to 3%, banks announced they were lowering the prime lending rate from 6.5% to 6%.  This has been the lowest prime interest rate since the spring of 2005.

If you remember, 2005 was back when everybody was buying a house or refinancing.  Why was that?  Because back then, people were getting really low mortgage and refinance rates, and their payments were affordable.  Well that time is back and it’s happening now.  Save yourself some money and take advantage of the lower rates while you can, the lower Fed rate definately helps mortgage refinancing.

- Ken S.

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