I have been overhearing some concerning conversations out there – people who are waiting for the interest rates to keep falling. Let us address this misconception about interest rates with a little background.
The Fed cuts interest rates by two main factors. The first are the rates charged to the banks when the bank borrows money from the Fed or other banks. The second affects the prime rate – which many unsecured loans are based on. Still, both of these rates don’t necessarily trickle down into the two places people most use debt – mortgage rates and credit card rates. These are set by banks, and do not always follow the Fed’s trends.
The stock market and borrowing trends influence mortgage rates the most. The risk factors perceived by banks affect these rates. It should not take much thought to realize that mortgage lenders see almost any loan these days as risky. Therefore, rates are more likely to increase.
Credit cards are typically the one item that banks rely on for a secure source of income. As banks struggle to recapture losses in the mortgage business, they will turn to their credit card revenue. The simplest solution could be to raise your interest rate – as most terms and conditions allow them to do that at any time.
Even if you have a loan that follows prime currently, there are rumors out there that the Fed is done cutting rates. Prices are souring, especially the cost of oil and food items. Inflation has become a global issue and the world is reacting. Lowering interest rates will have a negative reaction on prices. The Fed’s main job is to keep inflation at bay… therefore their hands may be tied in reducing interest rates – even though the spending is falling and unemployment is growing.
My advice… don’t wait for interest rates to drop further. There are many signs this is not in the cards.
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