WHAT THE INTEREST RATE CUT MEANS FOR MORTGAGE RATES


Mortgage rates have plummeted since the beginning of the year to the lowest average since 2016 as a result of market movements in response to the coronavirus. While the Federal Reserve adjusts short-term interest rates, mortgage rates fluctuate based on long-term bond rates.

Current low rates have already caused a boom in refinance activity. And demand among home-buyers remains elevated. As a result, lenders don’t need to give Americans much more incentive to apply for new home loans. Those in the refinance market would be smart to lock in rates now.

One exception to the mortgage rates trend could be home equity lines of credit, or HELOCs. These are adjustable-rate loans based on the prime rate. As such, they are set to see a drop in interest rates, since the prime rate does closely follow the Fed’s benchmark federal funds rate.

Variable-rate loans, such as 3/1 and 5/1 ARMs, as well as home equity lines of credit, or HELOCs, get more or less expensive as the Fed boosts or lowers rates. This can be a boon for borrowers or a drain on their wallets, which makes variable-rate loans a sometimes-risky proposition. Products like 5/1 ARMs give consumers the first five years with a fixed rate; after the fixed-rate period ends, there are annual rate adjustments for the remainder of the loan. So, if your rate drops during the adjustment period the cost of your ARM drops, too.

The problem is that rates don’t always drop. So, it’s important for borrowers to analyze all scenarios: how much they’ll spend as well as how much they’ll save if rates rise and fall. It’s important to ask yourself: can I afford my mortgage payments if rates spike? 




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