Why Are VA Mortgage Rates Going Up When Fed Cuts Rates?

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Frank P. Lozano, VA Loan Specialist, Amerisave Mortgage

Is a Fed rate cut really good for mortgage rates?

The Fed can only control the Discount Rate and the Fed Funds Rate. Those two are completely different from VA mortgage rates. A VA mortgage rate can be in effect for 10 – 30 years, a rate that is set by the Fed can change daily.  Another assumption some make is thinking 30-year Treasury bonds or 10-year Treasury notes are directly linked to VA mortgage rates.

Those two are government backed securities which are secured by the U.S. government and have no direct effect on VA mortgage rates.

So the HUGE question festers on, what are VA mortgage rates based on?

As it turns out the answer is VA mortgage-backed bonds known as Mortgage Backed Securities (MBS). Bonds issued by Fannie Mae and Freddie Mac (MBS) and the trading performance of those bonds will determine the direction of VA mortgage rates. Finding what causes Veterans Administration mortgage bonds to move will give you the keys to finding out what makes mortgage rates rise or fall.

Inflation will always be bad for any long-term bond because it erodes away at the future returns. Since the bond will pay a set amount over a long period of time, that amount will be less valuable if inflation is up. Over the past several years, one catalyst that seems to be working in the opposite direction of MBS prices is the NASDAQ and broader stock market.

Stocks & Bonds and How they Affect Mortgage Rates

As bond prices rise, interest rates fall. As bond prices fall, interest rates rise. A study was conducted and showed that as the NASDAQ moved higher, bond prices moved lower causing interest rates to rise. As the NASDAQ declined, mortgage bonds benefit, causing the mortgage rates to go down. Additionally, and unlike common opinion, the Fed rate cuts had virtually no direct effect on mortgage rates.

The bottom line is it is not necessarily what the Fed does that affects mortgage rates, it’s how the NASDAQ and broader stock market interprets the Fed’s action.  That is what will ultimately influence the direction of mortgage rates. This is because money managers and mutual fund companies typically keep funds in either stocks or bonds with very little in cash. If stocks are in favor, money is pulled from bonds, causing bond prices to go down and interest rates to go up. When stocks are sold off, the money is then moved back into bonds, which improves bond prices and causes interest rates to dip.

Predicting the future of rates is tough and nothing is written in stone. So keep an eye on the NASDAQ, and bear in mind that the best rates may be several years behind us. But, mortgage rates are still low and could have some quick dips hear and there and so my advice is to make the most of them while they last.

 

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