So you may have heard back in December that the Federal Reserve raised short-term interest rates.
Since then, rates for mortgages have actually fallen quite a bit, which seems counterintuitive. What’s next, cats and dogs living in harmony?
Zany animal behavior aside, what’s causing this crazy rate environment and how should you react if you’re looking to get a mortgage? This post seeks to answer those questions, so let’s jump right into it.
Mortgage Rate Basics
Before we address the particulars of what’s keeping interest rates low right now, let’s talk a little bit about how mortgage interest rates are set.
The Federal Reserve makes a decision at each of its meetings on what the federal funds rate should be. This has a good deal of impact on short-term interest rates, but longer-term interest rates often see heavier influence from other market forces.
The biggest influence on mortgage rates is the purchase of mortgage bonds on the bond market. If more people are buying mortgage bonds due to events in the economy, this drives yields (the rate of return) down on those bonds, because investors don’t have to be lured by high rates. This means mortgage rates will push lower.
If, on the other hand, happenings in the economy cause people to divest from the bond market and throw more money into stocks, there’s a good chance mortgage bonds will sell off as well, causing yields to rise and rates to go up.
That’s a very broad-strokes overview, but the details are really quite fascinating. If you’re interested, you can learn more about the process and ways the Fed can influence mortgage rates.
It’s important to note that although baseline interest rates are set this way, they have little to do with the rate that you personally receive from your lender. That has a lot more to do with factors like your income, credit rating, assets and property type. It’s comforting to know that unlike Fed policy – which is decided by 10 people sitting in a room – you have some control over your interest rate.
What’s Happening Now?
The Fed raised interest rates in December, but since then, various events have caused people to continue throwing money into the bond market as a safe haven, hedging against economic downturns around the world.
What’s causing all the chaos? There are two events that are having a big impact in what’s going on in both stocks and bonds right now:
- China has been one of the world’s fastest-growing economies, but recent slowing in this breakneck pace has investors all over the world spooked. This is one case where the price of tea in China might actually be affecting your mortgage rate for a home in Detroit. Investor logic goes like this: If China is slowing down, our economy could just as easily slow down. I’d better put my money in safer assets, like bonds.
- Oil prices have been very low all year due to oversupply in the markets. With oil prices at these levels and no certain indication of when they might go up, people invest in the bond market in order to protect themselves against further losses.
The combination of these events has kept mortgage rates at bay for some time now, hovering at or near multi-year lows.
What Should You Do?
With all this craziness going on, how should you react? How can you take advantage of what’s going on today to best position yourself and your finances for the future?
Depending on the way your investments are balanced, there’s a pretty good chance that for many of you, you may not want to look at your retirement account right now. On the other hand, mortgage rates are really low right now because people are extremely attracted to the safety of the bond market. You have a unique opportunity right now where you can have your cake and eat it too.
Given the somewhat speculative nature of both the stock market and oil prices, both of these things could bounce back tomorrow and your 401(k) would be very happy.
If you’re in the market to purchase or refinance a home, you’d be even happier if you locked in that super low interest rate just before people went back to the stock market and mortgage rates ticked back up. You get the best of both worlds.
If you haven’t locked your rate yet, now would be a really good time to do it. I don’t know how long this is likely to last, but I know I it can’t go on forever. You might as well take the opportunity to get a great rate before it disappears.
Are you looking to get started? Check out Rocket Mortgage and get that rate locked in at supersonic speed.
If you still have questions, leave them in the comments and we’ll get them answered.
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