Whenever the Federal Reserve announces a change to the Fed Funds Rate, headlines explode — and many homeowners assume mortgage rates are about to move in the same direction. But here’s the reality: the Fed Funds Rate does not directly set mortgage rates.

So what does it actually do?

The Fed Funds Rate is the interest rate at which banks lend to each other overnight. When the Fed lowers its interest rate, banks’ borrowing costs decrease. That drop usually brings down the prime rate — the benchmark lenders use to price many consumer loans.

This is where the Fed’s move matters most for homeowners:

• Home Equity Lines of Credit (HELOCs): These are almost always tied directly to the prime rate. When the Fed cuts rates, your HELOC payment may drop almost immediately.
• Home Equity Loans: While fixed-rate home equity loans aren’t tied as tightly to the prime rate, they often become more attractive when the Fed eases.
• Credit Cards & Short-Term Loans: These track prime closely, so you can feel rate cuts quickly in your monthly payments.

What about 30-year fixed mortgages?

That’s a different story. Mortgage rates are influenced far more by the bond market — particularly the yield on the 10-year U.S. Treasury — than by the Fed Funds Rate itself.

Here’s where it gets interesting: after a Fed cut, mortgage rates can actually rise if investors move money from safe bonds into riskier assets like stocks. (Which is exactly what happened after the Fed’s most recent cut.)

The Bottom Line

If you have a HELOC, variable loan, or significant credit card debt, Fed rate cuts can deliver immediate relief. But if you’re watching for a lower 30-year fixed mortgage rate, don’t expect it to follow the Fed step-for-step. Those rates march to a different drumbeat. But, it is a great time to get a HELOC or HELOAN and stop the bleeding on your consumer debt.

At MortgageSimplified.net, our job is to help you understand the moving parts of interest rates — and make sure you’re ready to act when the right opportunity appears.