How does a Fed rate cut or hike affect interest rates for borrowing?
When the Federal Reserve cuts or raises their Federal funds fate this has an indirect affect on interest rates for some home loans. When the Fed makes a change to its Fed Funds rate (the interest rate that banks charge each other), we often see a mirror image adjustment to what is called the prime rate. The prime rate is the rate it costs banks to borrower money over night and is currently at 7.75%. When the prime rate changes, this triggers a rate adjustment with indices, which are the financial products that determine interest rates for shorter term loans such as 3-year, 5-year or even 7-year ARMs. These short-term loans have interest rate adjustments periodically based on Treasury averages or specific indices like the London Interbank Offered Rate indexes (LIBOR). Knowing what Treasury average or index your ARM is tied too will help you keep an eye on any fluctuations. Check your loan documents to find this information. For longer-term home loans – such as 30 or 15 year fixed rate l
