Mortgage interest rates saw a drop this week. Things have been crazy on the mortgage market lately. Rates have been a bit volatile, and lately they have been trending up as inflation increases. And, even though the Fed rate cut earlier this week didn’t directly affect mortgage rates, there is an indirect connection. Tom Vanderwell on Straight Talk About Mortgages makes this connection between the Fed rate cut and mortgage rates:

Why would that cause mortgage rates to drop? Inflation and the value of the dollar. The value of the dollar has dropped dramatically since the Fed started lowering rates and it is anticipated that it will rise “somewhat” now that we’re in “pause” mode. So what? If the value of the dollar goes up, the cost of oil comes down. If the cost of oil comes down, inflation drops. And, if inflation drops, what happens to mortgage rates? They tend to drop as well.

Indeed, mortgage interest rates are more closely tied to 10-year Treasury rates, since both are long-term and the Fed funds rate is a short-term indicator. For buyers, the drop in mortgage interest rates is attractive, since it means that they will pay less in interest over the life of the loan.

Additionally, for home equity loan borrowers — those with variable rates — the Fed rate cut is more directly influential. Those with variable rate ARMs and HELOCs (and those with credit cards), should see a decrease in the interest rate charges they are getting.

It remains to be seen whether or not the current drop in mortgage interest rates sticks around. Many factors influencing the economy, including when home prices hit bottom and can start recovering, will influence where mortgage interest rates go from here.

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HELOC, ARM, Fed rate cut

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