What the Fed did & how it affects mortgages

Imagine that banks lend money to each other overnight, and that rate is set by the Federal Reserve (the “Fed”). Yesterday the Fed dropped that key overnight rate by 0.25% (25 basis points). In very simple terms: the Fed made it cheaper for banks to borrow money.

 

Now: does that mean your mortgage (which is a long-term loan like 30 years) goes down by exactly 0.25%? Not automatically. Here’s how the process works:

Because banks can borrow more cheaply, in theory they might pass some of that savings to borrowers (people like you getting a home loan).

But 30-year fixed mortgage rates aren’t tied directly to the overnight Fed rate. Instead, they follow long-term interest rates and investor expectations (for example the yield on 10-year U.S. Treasury bonds) because lenders want to know what the money they lend now will cost them for many years. 

So when the Fed cuts its rate, sometimes mortgage rates fall, sometimes they don’t move much, and sometimes they even rise a little — depending on what investors think about inflation, growth, how risky things are, and where long-term yields are going. Investopedia+1

For someone buying a house (like you in Madison, WI) or refinancing, a cut by the Fed can create an opportunity (if lenders pass savings along and long-term yields don’t spike), but it’s not a guarantee.

In short: Think of the Fed rate cut as lowering one cost (short-term money cost) but the mortgage rate is a much bigger “bundle” of costs, risks, time, and expectations. So it helps, but doesn’t mean “mortgage rate drops the same day by 0.25%”. If the Fed cut rate (like yesterday)