The Fed’s decision to cut the
federal funds target rate

Federal funds target rate
The federal funds target rate is the short-term interest rate that banks charge other banks to borrow money overnight from the Federal Reserve System. The actual rate, or effective rate, changes daily and may be above or below the targeted rate. The FOMC sets the rate at its regularly scheduled meetings but may opt to change it between meetings should economic conditions warrant a change. by another 25 basis points may be a great thing for people shopping for fixed-rate mortgages.

Then again, maybe not.

Trying to figure out how a cut in the federal funds rate might affect mortgage rates is “one of those things that drives people crazy,” says Bob Walters, chief economist for Quicken Loans.

“It’s extraordinarily difficult to predict the future,” Walters says. “If we were good at it, we’d all be Warren Buffet.”

Orawin Velz, director of economic forecasting at the Mortgage Bankers Association in Washington, D.C., agrees that making predictions about the direction of mortgage rates is hazardous, both “for the average person, or for a trained economist.”

Despite such caveats, Walters and Velz agree that some consumers may be able to take advantage of the Fed’s quarter-point rate cut.

For example, they say that the Fed’s latest cut — coupled with its previous half-point cut in September — makes now an excellent time to refinance, especially given that mortgage rates are at or near their lows for the year.

“If you’re looking at refinancing, it makes sense to do it now,” Walters says. “It’s one of those things that’s a no-brainer.”

Walters also believes the Fed’s recent rate cuts offer hope to the broader — and recently beleaguered — housing market.

“We’re all feeling the pain of the housing market, but the silver lining is that long-term rates are falling and will continue to fall,” Walters says. “Homes are on sale in America. And because long-term rates are falling, financing costs also are falling.”

Over time, these factors will combine to create equilibrium in the housing market, Walters says.

Walters and Velz each also caution against being overly concerned with waiting for mortgage rates to “bottom” before making a move.

For example, Velz says that a declining real estate market in many parts of the country has given buyers enough bargaining power to score a great deal regardless of interest rates.

“Right now is a buyer’s market,” she says. “You could wait, but maybe the right house could go by.”

Take away
Now is the time to give adjustable-rate mortgages a second look. It’s also an excellent time to refinance. Plus, with it being a buyer’s market in home sales, it might be a good time to get a deal.

Bankrate’s rate tables can help you
compare mortgage rates in your area. Bankrate can also help you
calculate whether a fixed-rate or adjustable-rate mortgage is better for you.

To determine whether refinancing is right for you, use Bankrate’s
mortgage calculator.