Real Estate Investor · Las Vegas, NV · Member since 2008 · 1k+ posts · 447 votes
17y
It will affect the rate on home equity lines and some credit cards as well as the prime rate. Mortgage rates are impacted by the rates on the 10-year Treasury note. A cut in Fed funds does not equate to a decrease in mortgage rates. Frequently lower short-term rates result in higher inflation, which in turn means higher rates on long term interest rates.
Real Estate Investor · OH · Member since 2008 · 1k+ posts · 86 votes
17y
The only thing this cut has done so far to mort rates is make them go up. I have 2 quotes within the past week and both were at 8% with 3K in closing cost on a 35K cash out refi. Horrible!!!
Real Estate Investor · Las Vegas, NV · Member since 2008 · 1k+ posts · 447 votes
17y
It won’t drop mortgage rates and it may cause them to go up a little. To get a feel as to where mortgage rates are headed you need to watch the 10-year Treasury Note. Lowering short-term rates can lead to inflation. Inflation usually results in a rise in the 10-year Treasury Note rate.
That's not entirely accurate, mortgage rates are based on a wide basket of investment options which does include the 10yr, but also a number of other components (such as LIBOR and GSE debt). Mortgage rates are not moving down despite the FED approaching ZIRP because of the risk premium assigned to holding asset backed paper.
Basically the FED has lost control of the massively deflationary situation - and we may very well see interest rates shoot to the moon if the US treasury market dislocates.
That said, if we do make it through this crisis unscathed, deflation succesfully abates and institutions resume lending then we may see very low interest rates.
It's a coin toss these days just like any other financial decision...
I think you guys are misunderstanding the FED funds / discount rate. That is only the rate at which banks borrow. IF banks are lending that rate + risk premium is what you are borrowing at. Right now risk premium is super high.
For example with Sallie Mae, JCF on the rocks, student loans are yielding very high rates if you can get one at all.
As for banks paying us, troubled "banks" such as GMAC are offering 4.5-5% CDs. Considering this is FDIC backed you are essentially buying 6 / 12 month US treasuries at 350bps+ over current yields - a great investment.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
17y
CDs should always be considered as a reference point in evaluating any investment. CDs have essentially zero risk of capital loss and a guaranteed return. Just stay below FDIC limits in an insured bank and you only lose if the US government collapses. Not impossible, but we'll have bigger issues then. If that happens, most investments, including real estate will be total losses.
Like Jon said, CDs are backed by the FDIC, the FDIC is backed by the "full faith of the US govt" (despite only have ~50bil of reserves)
You are buying US treasuries at a 350bps premium.
My personal opinion is there is a greater than 0% chance US treasuries are defaulted on but they are still about as safe as you can get.
I have money at Indymac. The FDIC conservatorship was a bit bumpy as we were over the FDIC 100k (it was a joint account) but that was all resolved within a few weeks.