Which Comes First -The Fed, Interest Rates, or Refinance Loans?
In the discussion of refinance loans, one of the most prevalent topics is interest rates. A common misconception of those who are considering taking out a refinance mortgage loan, is that low interest rates should automatically translate into a go signal for taking out a second loan. While this is not the case, it is still prudent to understand what factors influence mortgage interest rates.
The Fed and Refinance Loans
In a nutshell, the laws of supply and demand impact interest rates. When the economy is weak and borrowing occurs less frequently, the interest rates drop. However, when the economy is strong and borrowing is prevalent, interest rates increase.
Furthermore, the actions of the Federal Reserve, or "The Fed" and where the rate of the fed funds is positioned, also influence the interest of refinance loans.
The Short and Long (Terms) of Interest Rates
When banks borrow funds from each other, the interest that is charged is referred to as the "fed funds" rate, or the federal funds rate. A rate equalling two years or less after maturing is classified as a short-term rate. How does this influence refinance loans? After the Federal Open Market Committee (FOMC) increases or decreases the Fed Funds rate, those mortgage rates that are connected to interest rates that are short-term, are influenced. These mortgage rates include adjustable rates and home equity rates. After the dropping of short-term rates, spending and borrowing typically are boosted. One of the unwanted results can be inflation, which the Federal Reserves constantly strives to manage.
On the other hand, rates that reach maturity after a minimum of 10 years are referred to as long-term interest rates. These include refinance loans such as 30-year mortgages. Short-term rates influence the long-term interest rates in an indirect manner, as they can increase when fretting about the current inflation also rise. Starting in 2004, the Fed began to increase interest rates with short-terms. As a result, those homeowners with adjustable rate mortgages have been using refinance loans via fixed-rate mortgages with lengthier terms. This action involving refinance loans has been done to avert rising rates, particularly as long-term rates have steadily remained low for a long time.
As the U.S. economy is too abstruse to make correct predictions, even the most renowned financial gurus cannot be certain if or when an alteration in the rate will occur. Nevertheless, comprehending these aforementioned factors can help save you a huge amount of funds when considering refinance loans.
