Another perfect example of why not to believe (literally) everything you read in the news.

Most every time there is a story or news item about the Federal Reserve dropping interest rates I get a call or 2 from a potential buyer asking; “What are the new rates, I read/heard/saw they dropped a half a point yesterday.”

Typically they are talking about turns out to be the Federal Reserve rate; that is the rate that member banks charge each other for overnight loans to balance their books each day.

A bank’s balance sheet needs to balance every day so if they have a surplus they lend some to member banks to help them out and vice versa when they have a shortfall; then they borrow to balance the books.

The Federal Reserve has been aggressively cutting those rates to keep the economy humming along since September of 2007. The Fed Funds rate has been dropped a full 3 percentage points to it’s current level of 2.25%.

“OK, that’s all very interesting Jim, but if banks can borrow for less they why can’t they lend for the same amount?”

Good question.

While the federal funds rate of 2.25% only deals with overnight loans between banks, a typical mortgage obligates funds for up to 30 years and to an individual, not a bank. Therefore the risk exposure is greater and is compensated by a higher interest rate.

Since homeowner typically pay their mortgage off every 10 years, the 10 year Treasury note has roughly the same sensitivity to rate fluctuation as a 30 year fixed rate mortgage.

If you take a look at the current Bloomberg rates & bonds you’ll see the current 10 year AAA rated banking & finance bond rate is 5.29% today, the 15 year fixed mortgage rate is 5.22%, 30 year fixed is 5.63%, and the 1 year ARM is 5.65%.

So next time you hear about a Federal Reserve cut in rates please give me a call or email and we’ll check the current rates to see what they are.

2.25% would be a wonderful gift for homebuyers but but my sources tell me that the 5s are probably where we’re going to be for the rest of this year.

Now is a great time to buy and a 5.whatever % interest rate is a very good one and makes more homes affordable to more buyers.

If you’re thought about entering the buyer market make a stop by KnoxvilleHomeCenter.com to see all of the greater Knoxville area’s Realtor listings and then give me a call or email to go out and look at some of them.