When the prime rate goes down, why do mortgage rates often go up?
The Federal Reserve has a meeting, lowers the Federal Funds Rate, which leads banks to lower their prime lending rate which results in mortgage rates dropping, too, right? Usually wrong. It doesn’t work this way every time, but USUALLY when the prime rate drops mortgage rates spike up a bit.
Why?
To answer that I turned to my friend Jack who has been in the mortgage business since he was 17 years old. Imagine getting a mortgage from a kid still in high school, yet that’s exactly what happened with Jack, who grew up in the family mortgage business.
”It has to do with competition for money,” explained Jack. ”When the prime rate goes down it stimulates demand for business loans. Business loans are funded from the same dollar pool that funds mortgages. So this greater demand for business loans means there is effectively less money available to fund mortgages, so mortgage interest rates trend up as a result.”
I’m sure Jack is right but it sounds like a scam to me.
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