July 1, 2019
Orion’s staff closely followed the Federal Reserve’s decision a few weeks ago to keep interest rates steady. But the hint for a rate cut this month came as a relief to many after the federal funds rate was raised nine times in the previous three years (most recently in December). Since they look to you as experts, what should your clients know about the Federal Reserve’s actions, or lack of actions?
In general, rates tend to increase when our economy is doing well, and decline when our economy is not. Since the depths of the “Financial Crisis,” and since the last increase, concerns about a slowing economy and a looming U.S.-China trade war have caused the central bank to rethink course. Your clients should know that the Federal Reserve, aka Central Bank, does not set mortgage rates. It is best known for setting the overnight Fed Funds rate, but the same factors that nudge the Fed to change the overnight rate impact other interest rates, including mortgage rates.
The effects for the everyday American are many. For many, a rate reduction could spell a reprieve in escalating borrowing costs (e.g. mortgage, home equity loan, credit card, student loans, car payment, etc.). Orion’s brokers know that long-term fixed mortgage rates are generally pegged to yields on U.S. Treasury notes, and mortgage rates are already substantially lower since the end of last year, and the lowest since November 2016. (Ask your Orion AE about our rates – you’ll be surprised how good they are!)
But for smaller things, like credit cards or auto loans, brokers know that there may not be a material effect. For example, a quarter-point difference on a $25,000 loan is $3 a month. In regard to student loans, it depends. While most student borrowers rely on federal student loans, which are fixed, more than 1.4 million students a year use private student loans to bridge the gap between the cost of college and their financial aid and savings, which may be fixed or may have a variable rate tied to the Libor, prime or T-bill rates.
Interestingly enough, as a result of the increase in interest rates, savings rates that banks pay your clients and other consumers on their money are now as high as 2.5 percent, up from an average of 0.1 percent, on average, before the Federal Reserve started increasing its benchmark rate in 2015. In layman’s terms, savers can now earn more on their savings than the current rate of inflation.
Considering the above, you should be able to see how important it is for you and your clients to stay abreast of Fed decisions and how they impact personal finances. Which is the reason Orion’s AEs stay abreast of the latest news from the Fed and from the bond markets. Interest rates aren’t the only factors involved in financing your client’s home, but they are important.