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Low Interest Rates Might Hurt More Than Help

Even mortgage rates might not see much of a change.

"As the fed funds rate falls, the mortgage rate does not come down to meet it," says Susanne Trimbath, chief executive of research firm STP Advisory Services and a former document editor for the San Francisco Federal Reserve. "If people look at where it says how your rate is calculated for mortgages, home equity loans and even credit cards, not many of them are tied to the fed funds rate."

Most mortgage products are tied to the prime lending rates set by banks or to the London Interbank Overnight Rate (LIBOR). "There is no formula that says 'prime is set at fed funds plus X,'" Trimbath says.

In addition to the decision to hold steady with interest rates, the Fed last week announced it would shift away from its $1.25 trillion dollar acquisition of mortgage-backed securities. That decision could impact mortgage lending more than the fed funds rate.

"With the Fed looking to leave the mortgage-backed security market, all eyes are on private money to step in a fill the void," says Damien Melle, CEO of West Coast Property Specialists, a real estate brokerage in Southern California. "Either the effective mortgage rate will increase by at least 100 basis points to compensate, or the feds will need to jump back into the market to cover the short fall. If interest rates rise from 5% to 6%, this will price many buyers out of the housing market."

The Fed's decision to keep rates near zero could also prove detrimental for retirees and seniors living on fixed incomes. It's common for retirees to boost the value of their nest eggs by buying certificates of deposit, conservative securities that typically pay more interest than savings and money market accounts. A low fed funds rate has hurt returns on CDs, a trend that's likely to continue, says Robert Laura, a partner at Synergos Financial Group, a Michigan-based advisory firm.

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