When the Federal Reserve lowered the Fed Funds Rate by 0.75% yesterday, it was in response to economic weakness that mounted since its last meeting December 11, 2007.
By contrast, the mortgage markets meet every day.
Because of this, mortgage rates had already “priced in” the weakness to which the Fed was reacting.
This is why mortgage rates did not fall by the same 0.75% yesterday — they only fell slightly.
Two important rates that did fall, though, were the 6-month LIBOR and the 1-year constant maturity treasury (CMT).
These are two popular interest rates used in adjustable-rate mortgages.
When an ARM adjusts, it adjusts according to a simple math formula:
(New Interest Rate) = (Index) + (Margin)
Index: A variable, usually 6-month LIBOR or the 1-year CMT.
Margin: A constant, usually ranging from 1.500% to 6.999%
So, if the indices move lower — as we saw yesterday — the adjusted interest rate on a mortgage is going be lower, too.
As an example, LIBOR fell percentage point over the last month from 4.83% to 3.83%. This means that mortgage rates tied to LIBOR will adjust 1 percent lower than they would have in December 2007.
For every $100,000 in a principal + interest loan, this yields $65 per month in savings.
Of course, each mortgage has unique index, margin and rate characteristics so talk to your loan officer about how your ARM operates.