Every time the Feds meet and drop the discount rate, my phone rings:
“I heard on the news yesterday that rates went down. So what’s the rate now if I refinance?”
The Fed (The Federal Reserve) meets 8 times a year (excluding emergency sessions) to discuss and make decisions on the state of the economy. That includes making decisions like lowering, raising or maintaining the overnight discount rate.
The “discount rate” is the interest rate at which banks borrow money from each other. The Feds’ current philosophy is:
· Lower the discount rate so that lenders save on the cost of money
· Pass the savings on to the consumer
· Spur an economy that many think is already in a recession.
So how does that affect consumer interest rates?
The discount rate has a direct correlation with the Wall Street Journal prime rate (commonly known as prime) – the rate most banks and lenders use when lending customers short term and revolving loans i.e. credit cards, home equity loans, personal loans, business loans, etc. Some of you may have home equity lines that are “prime plus” or “prime minus”. If you read the fine print on your credit card agreements, you will see that the interest you pay is also based on prime plus a margin. Hence, that’s how lenders pass on savings on to the consumers. In other words, they want you to start using your credit cards again.
Be patriotic. Save the economy. Buy a new TV!
Allow me to answer everyone’s question: Yes, the Feds dropped the discount rate by .75%, but it doesn’t have any direct effect on long term mortgage rates. Even though (more than likely) the markets in general will have a quick knee jerk reaction to the Fed announcement, mortgage interest rates will not be directly affected as a result.
With that said, mortgage rates remain historically low. Refinancing is still a viable option for many (not everyone) out there. J
