The Fed cut rates...why don't mortgage rates follow?

In an effort to bolster the US economy, the Federal Reserve has lowered the prime rate several times over the last few months.  But Fed rate cuts don't always translate into lower mortgage rates. Today, rates are falling, but that trend will reverse if investors conclude that the Fed's monetary stimulus, combined with Congress's promised fiscal stimulus, will bring unwelcomed high inflation. Rising inflation would bring higher mortgage rates.

Mortgage rates are not determined by the Federal Reserve.  Mortgage rates are actually determined by the investors who supply the capital to fund those rates.  Mortgage loans are brokered by banks and mortgage brokers as investments.  In simplest terms, the money is lent to a homebuyer, or home owner refinancing their loan, and then the loan is sold to an investor who collects the interest.  So the interest rate is determined by what an investor is willing to pay for that investment.

That's why mortgage rates are so hard to pin down.  They are not static...they change just like the price of a stock.  When you are applying for a mortgage, your rate is locked in at some point, which fixes the rate based on what investors are willing to pay.  And that is why it is a good idea to work with a mortgage broker or banker who is working for your best interests, because setting up the right loan is a not a science, it is an art.

Granted, the changes the Fed makes can influence mortgage rates significantly.  The value of the dollar, the bond market, inflation, recession, all these economic factors affect the investors decisions to put their money into the mortgage market. The mortgage market is competing with other investments and if those other options look more promising to an investor, mortgage rates will increase.

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