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How the Fed rate cut affects real estate interest rates
By | February 18, 2008
There has been a reduction in the Feds fund Rate and though it doesn’t affect the mortgage rates directly it does indirectly have an impact on the interest rates that investors utilize. When they say that the Feds have slashed rates what they mean is that the lending rate between banks and other depository institutions has been slashed and this in turn means that when banks can borrow money at a lower rate, they in turn pass this gift on to the public. This means that the general public can borrow money at a lower rate.
The Prime Rate is linked directly to the Federal Reserve and this is something real estate investors should be paying attention to. The Prime Rate has fallen 2.25% in the last 6 months and this means there is a 2.25% saving for all investors that use lending that is tied to prime.
Though the Prime Rate is generally not used to secure an investment property long term the Fed Funds rate helps the cash flow of the average investor. Generally interest rates follow the lead set by the Feds and this has caused the decline in interest rates in the recent past.
The Prime Rate also affects the financing of spec homes and construction loans. Most investment properties are financed with interim construction loans which are based around the Prime Rate. Thus since the Prime Rate has fallen investors end up saving on a loan.
People finance rehab projects through hard money, credit cards or sometimes even home equity lines of credit. Most investors use lines of credit on their homes or existing properties to finance rehab projects. This again is favorable because home equity lines of credit are based on Prime Rate. Since that has now fallen investors again end up saving.
Topics: Interest Rates |