How does the Feds Fund rate change the interests rate in mortgages?
A change in the federal funds rate usually results in banks immediately changing their prime lending rate by a like amount. The federal funds rate is the interest rate banks charge each other to borrow banking reserves held at the Fed. You can view it as a bank’s marginal cost of funds. Thirty-year fixed-rate mortgages aren’t going to be priced off federal funds, which is an overnight lending rate between banks. Trends in the yield of the 10-year Treasury note are a much better predictor of where interest rates are going in the fixed-rate mortgage market. At this writing, the 10-year Treasury note is yielding 4.95 percent. Time may prove me wrong, but I don’t think there’s a whole lot of room for the 10-year note’s yield to reach much lower yields over the next six months. Credit risk and collateral (down payment) are two of the major determinants of mortgage interest rates influenced by the consumer.
