Impact of Potential Fed Rate Cuts

According to recent reports, the Fed is considering cutting interest rates.  These cuts would be due to the continued low inflation, slow growth, and trade war.  This is a complete contradiction of the stance the Fed had about six months ago.

Why would this occur? Typically, it is a strategy used by the Fed to keep a possibly looming recession at bay.

The question is though, how could any cuts affect the housing market?

Let us start with current homeowners with a mortgage.  A fed cut means, not a whole lot unless you have an adjustable rate mortgage (ARM).  If you have a mortgage with a fixed rate, you really do not care. Your rate is fixed, obviously.  Now, if you have an ARM, than a cut should lower your monthly payments. Your rate would be lower, therefore lower payment.  

There may be some value out there for those considering or currently using a HELOC.  HELOCs or home equity lines of credit are linked to the Fed’s rates. Therefore, lower Fed rates could lead one to take advantage of a HELOC’s use for consolidating debt or helping with covering a major expense.  

If you are a home buyer, the impacts are not as easily determined.  The Fed’s rate changes do not necessarily always correlate with changes.  There have been occasions over the last few decades, when the Fed manipulated rates, mortgage rates did the opposite.  In 2004 and 2005, the Fed raised rates nearly 20 times. The initial reaction by lenders was reduce mortgage rates. Yet, by summer 2006, the rates shot back up.  The same activity occurred in 2017, not near the same extremes, but still the same reaction.

This does not necessarily imply rates won’t come down.  Mortgage rates are currently extremely low, and there does not seem to be any indication of that changing in the near future.

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