November 5th, 2019 11:38 AM by Richard Sardella MLO.100007700/NMLS 233568
Recent rate cut means smiles for mortgages and credit cards, sad news for savers
When the Federal Reserve cuts rates, there is a reason for it. While there is no crystal ball, the Feds look for signs of a slowing economy and often hedge their bets by announcing a rate cut to encourage more consumer spending.
The effects of three rate cuts over the past year offer a mixed bag, with some Americans taking advantage of cheaper loans (impacting your mortgage, home equity loan, credit card, student loan tab, and car payment). Lenders, however, may be less included to lend money in anticipation of an economic slowdown. Throw in less interest on that rainy day nest egg, and in some cases, buying power is lost over time.
So let’s study all the edges of the rate cut sword as described by CNBC’s Jessica Dickler. First off, the prime rate (the rate banks extend to their most creditworthy customers), is typically 3 percentage points higher than the federal funds rate. That not only determines your savings rate; it also is the rate used for many types of consumer loans, particularly credit cards.
“With a rate cut, the prime rate lowers, too,” she says, “And credit cards likely will follow suit. Most credit cards come with a variable rate, which means there’s a direct connection to the Fed’s benchmark rate.” This means cardholders could see a reduction in their annual percentage rate within a billing cycle or two. However, credit card debt will continue to be expensive, with only a small dip in the foreseeable future.
Dickler says it’s a good time to shop around for a zero-interest balance transfer offer because if the economy continues to soften (the reason for the three cuts in the past year), these terms could get less generous. You can also call your credit card issuer directly and request a break on interest rates. You have nothing to lose.
As for savings, online banks typically offer the highest yields because they come with fewer overhead expenses than traditional bank accounts. Shop around for the best rates. And don’t forget that although you can’t access it for while if you do so, you can lock in a higher rate with a one-, three- or five-year certificate of deposit.
While the economy, the Fed, and inflation all have some influence over long-term fixed mortgage rates (which generally are pegged to yields on U.S. Treasury notes), there is no direct connection to mortgage interest rates. Historically speaking; however, mortgage rates are the lowest that have been in many years — always good news for the housing market, whether it be existing homes or new construction. If you’re not buying, however, this also makes it a good time to both refinance or pull equity from your home.
Wondering if buying a car might be cheaper with rates this low? The recent rate cut will likely not have any material effect on what you pay, according to Dickler. “For example, a quarter-point difference on a $25,000 loan is $3 a month, according to Bankrate,” she says. “Auto loan rates have remained low, even after years of rate hikes.” But it’s wise to reward of how other factors may affect a car purchase, as prices for them may rise due to trade wars increasing tariffs on materials.
Source: CNBC, TBWS
How Rates Move:
Conventional and Government (FHA and VA) lenders set their rates based on the pricing of Mortgage Backed Securities (MBS) which are traded in real time, all day in the bond market. This means rates or loan fees (mortgage pricing) moves throughout the day, being affected by a variety of economic or political events. When MBS pricing goes up, mortgage rates or pricing generally goes down. When they fall, mortgage pricing goes up. Tracking these securities real-time is critical. For more information about the rate market, contact me directly. I’m among few mortgage professionals who have access to live trading screens during market hours.
Rates Currently Trending: Neutral
Mortgage rates are trending sideways this morning. Last week the MBS market improved by +33 bps. This was enough to move rates lower last week. We saw a good deal of rate volatility at the end of the week.
This Week's Rate Forecast: Neutral
Three Things: These are the three areas that can impact rates this week. 1) Trade War, 2) Central Bank, and 3) Services.
1) Trade War: We start the week on a bit of high note as Commerce Secretary Wilbur Ross met with Chinese Premier Li Keqiang in Bangkok on Monday. Ross says that the two sides are "very far along" with a Phase 1 trade deal. Any further movement on a concrete date and place for the next physical summit meeting and/or official announcements of agreements on larger portions of the Phase I deal will hurt rates. Conversely, any breakdowns in talks could push rates lower.
2) Central Bank: This week we get interest rate decisions from the Bank of England and the Reserve Bank of Australia
3) Services: While the manufacturing sector in the U.S. and China has been weak, the services sector has been solid, with it accounting for almost 75% of our economic output. The ISM Services report is expected to show expansion, and at a pace, that is stronger than the last reading. We also get key services readings from China, Germany, and the EU.
Treasury Dump: Here is this week's auction schedule
The Fed: Here is this week's speech schedule:
This Week's Potential Volatility: Average
Last week we had the Fed rate cut, weak manufacturing, and trade pushing rates around. This week it is all about the trade deal. It looks like we're close to a phase 1 deal. However, if things breakdown again, we're likely to see rates dip lower on elevated volatility.
If you are looking for the risks and benefits of locking your interest rate in today or floating your loan rate, contact your mortgage professional to discuss it with them.
Richard Sardella has been actively managing and providing services in the mortgage industry for over 27 years. Richard serves on the board of directors as President of Colorado Home Mortgages Inc.
All information furnished has been forwarded to you and is provided by thetbwsgroup only for informational purposes. Forecasting shall be considered as events which may be expected but not guaranteed. Neither the forwarding party and/or company nor thetbwsgroup assume any responsibility to any person who relies on information or forecasting contained in this report and disclaims all liability in respect to decisions or actions, or lack thereof based on any or all of the contents of this report.
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