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What Does it Mean When the Federal Reserve Changes Rates?

Financial Solutions of California

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You won’t find many real estate agents or loan officers who can accurately answer this question. But at Financial Solutions of California, we do! That’s because our professionals don’t just canvass the neighborhood for leads, we research our craft in our quest to add real value and “Expand Your Financial Possibilities.”

What does this mean?

The Federal Reserve moves rates at the bank to bank level. The most widely followed rate that they control is the Federal Funds Rate, which specifies what rate a bank will pay to borrow another bank’s funds to cover any capital shortages overnight. The Prime Rate is usually set 3% above this rate.

What does it impact?

Now when the Fed announces a rate change, many people naturally assume that home loan rates are immediately going to follow. However, the real answer is not so simple. The only mortgage-related rate that is directly affected is the rate on Home Equity Lines of Credit (HELOCS). These loans are generally quoted as being a certain amount above or below the prime rate. So if you have a loan that charges you Prime – .50% (Prime minus a half) then your rate would have been 3.75% on December 13, 2017 (4.25% prime rate minus .50%). But then the Fed raised the Fed Funds target to 1.5%, an increase of .25%. Now you are paying only 4.00% on your HELOC.

How about 30 year fixed loans?

30 year fixed loans are a different story. These are affected primarily by movements in the 10 yr and 30 yr Treasury Bonds. And, like the stock market, these investments move according to market forces influenced by everything that happens under the sun, including a vast amount of psychology. Therefore, it is very common for you to hear “Rates have gone down,” but when you call your loan officer, he says “Rates have gone up!” That’s because the 30 year fixed rate can go down just because people believe the Fed will lower rates in the future or maybe not raise them very much. Then, when it actually happens, the market may actually go the other way because this was already anticipated months before. Whew!

How does this impact me?

In volatile markets, it is more important than ever to have a financial professional on your side that can interpret market activity and know when to suggest a major move, such as refinancing or shedding light on other resources you have in play, based on these changes.  Call us today and make an appointment to see how we can transform the way your family does business.

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Financial Solutions of California

Our goal is to provide families with the kind of integrated financial guidance that makes sense of the many financial issues impacting their lives.


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