March 18, 2020 · Budget, Credit, Investment, Real Estate

How the Fed Cut Affects Current Consumer and Mortgage Loan Rates

Recently, the U.S. Federal Reserve Bank’s (the Fed) Federal Open Market Committee announced it would cut interest rates to a historic low, with the basic—or “benchmark”—U.S. interest rate now in a range of 0 to 0.25 percent.

That's an incredibly low rate, and in response, there are a lot of very eager homeowners (or would-be new homeowners) intensely interested in refinancing their current loan or trying to get a new home loan right now. It is not surprising that people would respond so strongly to an interest rate cut, as it's a very natural response as everyone wants to save money on expenses, especially a mortgage, since that is often the single largest monthly expense in a household. We're getting lots of interest from potential borrowers about lower interest rates; however, it’s important that consumers understand that interest rates are not near the Fed's benchmark rate and are unlikely to get quite that low. Here's why.

It's because the Fed's benchmark rate is the interest rate banks charge each other to lend Federal Reserve funds overnight, and, while it eventually may affect consumer interest rates, it is not the rate for borrowing money for consumer loans, including mortgages.

For consumers, what the Fed's new benchmark rate influences is the prime rate, which IS the rate banks charge customers and credit unions charge their members. The prime rate affects many consumer interest rates, including—but not limited to—rates on deposit accounts such as checking, savings, certificates of deposit, bank loans, credit cards, home equity lines of credit, and adjustable-rate mortgages (and other variable rate short-term loans). Credit cards and other consumer loans are tied to the prime rate, and when you take out a loan or mortgage, your loan documentation contains references to the prime rate and the timing of any scheduled changes for it.

The truth is that there isn't a significant change in those rates related to the recent Fed cut yet. But Delta Community has always been committed to offering competitive rates to its members, and when there is a shift to lower interest rates we'll highlight it on our website.