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A home equity loan rate is, like most other rates, affected by what the government sets their rates at. Many people think that because the government lowers interest rates, home equity loan rates go lower as well. Not necessarily. Below are a few reasons why rates typically RISE when the Federal Reserve lowers rates, but first it is important to understand that comparing rates from multiple lenders is essential in getting the best deals possible. Lenders can set rates according to what they think you will agree to, which means, the rates are negotiable. This means you can save money by shopping around and comparing quotes from the different lenders that will compete for your business.
When rates are lowered, the "Federal Funds" rates are lower. It's the rate at which large banks lend funds to one another and is a "short-term" rate. Mortgage rates are long-term - up to 30 years. Longer-term rates are sensitive to expectations about inflation. When short-term rates fall - like the ones the Federal Reserve controls - borrowing and spending usually increase, which can actually cause inflation to rise. Longer-term rates, like mortgage rates, can rise when concerns about inflation increase.
Markets are often ahead of the Federal Reserve. Interest rates are determined every day in active public markets. If those markets believe the economy is slowing, interest rates may fall as markets anticipate that the Federal Reserve might lower short-term rates. This happened in the last half of 2000 when mortgage rates began steadily dropping, even though the Federal Reserve left their short-term rates unchanged. The opposite can happen as well. Mortgage rates can rise well ahead of the Federal Reserve increasing short-term rates.
It's almost impossible to accurately predict the future of something as complex as the U.S. economy. However, it is important that we, as consumers, understand some of these market dynamics. Sometimes, a lack of understanding can cost us a lot of money. That’s why it’s also important to shop around. The more questions you ask, the more likely it is you will understand how to deal and negotiate with lenders. It’s that simple. Shopping for rates is like shopping for an auto loan. It takes time and negotiating skills, but in the end, you will reap the rewards.
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