The Fed Cut Interest Rates

Posted by admin
December 22, 2008

On December 16th, the Federal Reserve cut interest rates to all-time historic lows. This is the first time the Federal Reserve has cut interest rates to a range of 0.00% to 0.25%. I am sure you have heard it on the news and how that is supposed to help the housing market.

So, what does this exactly mean to the consumer, homeowner, you?

Well, the Federal Reserve Target Rate is an overnight rate that deposit banks lend to each other. Think about this for a minute. This is how commercial banks operate. Net Interest Income is their game. Borrow money at low rates for a short-term (buy money), lend at high rates for a longer term (sell money). The banks make the spread on the rates. So, If Banks can borrow money at 0.00%, the this allows them to loan it out through consumer products such as loans and mortgages. Since they can borrow money cheaper, it allows more banks and investment enties to buy and hold mortgages. This demand to own higher yielding assets brings down the rates of mortgages (more investors want to own a higher yielding asset, the more demand, the less yield they require to own that asset).

What does this mean if you are looking for a loan modification?

Well, it makes refinancing possible more attractive if you’re credit is intact. There is also a possibility that lenders will be more leinient on dropping the interest rate on your loan given you have a more attractive option on refinancing. Speak with a loan modification professional or refinancing professional if you need help.

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