Many borrowers ask why mortgage interest rates don't immediately drop when the Federal Reserve lowers the prime rate.
As the country's economy consistently fluctuates, the Federal Reserve evaluates any changes and takes steps to address rapid inflation or economic recessions.
While the Federal Reserve's actions have a direct impact on the prime rate, mortgage rates are determined by the trading of mortgage-backed securities (stocks and bonds). This means that the real dynamic at the center of the interest rate shift is the competitive relationship between stocks and bonds.
As stocks, bonds and mortgage-back securities battle for the same investment dollars on a daily basis, only so much money is available to be invested. When the Federal Reserve lowers interest rates to stimulate the economy, the decrease in rates often causes a stock market rally. And when the market rallies, the money to invest in stocks comes from the sale of other investments, including mortgage-backed securities. When mortgage-backed securities are sold off to trigger stock market rallies, this causes interest rates to go up, not down.
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