The Federal Reserve And Its Impact On Mortgage Interest Rates
The mortgage you receive on your interest rate may not seem based on any one factor. And that’s true. When determining your mortgage interest rate, lenders will consider various factors, including your credit score and down payment amount.
But there is one key factor that affects mortgage rates across the country – federal reserve mortgage interest rates. Ultimately, the federal reserve mortgage rates can impact your ability to afford a mortgage payment.
It’s important to understand how the federal reservice mortgage interest rates come about. We’ll take a closer look at how these important rates are set.
What Does The Federal Reserve Do?
The Federal Reserve System is the name for the central bank of the United States. It’s heavily involved in how our economy functions. By monitoring financial institutions and implementing certain measures, it protects our financial system’s general stability.
“The Fed” makes decisions that influence important credit markets, like mortgages and auto loans. However, it can’t dictate the interest rates that your lender or bank charge you.
The Federal Reserve’s overall purpose is to help the U.S. economy run smoothly and protect the public interest. In practice, this means that the Federal Reserve strives to create an economic environment in which unemployment is low, prices are stable and interest rates are modest.
A key entity within the Federal Reserve is the Federal Open Market Committee (FOMC). The FOMC makes decisions for the Federal Reserve regarding its monetary policy. Typically, these decisions result in short-term interest rate movement and spending funds within its power. When short-term interest rate movements are enacted, mortgage rates are undeniably impacted.
How The Fed Can Influence Mortgage Interest Rates
So, how can the Fed influence mortgage rates? There are two main ways that this central bank can impact mortgage rates.
The Federal Funds Rate
The Fed has direct control over the federal funds rate, which is the interest that banks are charged when borrowing unsecured loans overnight. This number plays a critical role in moderating the interest rates throughout the economy.
Although mortgage interest rates won’t move in the same way as the federal funds rate, any movement from the Fed funds rate will likely lead to movement of mortgage interest rates.
When a change in the Fed funds rate occurs, you can expect to see impacts on short-term loans and adjustable-rate mortgages (ARMs) quickly.
Buying Mortgage Bonds
In addition to the federal funds rate, the Fed can use the money it has at its disposal to buy mortgage bonds as a strategic move for achieving its goals.
The Fed makes this happen by buying agency mortgage-backed securities (agency MBS). Agency MBS are bundles of mortgages packaged together and sold as a single security. They are sold by either the Government National Mortgage Association (GNMA or Ginnie Mae), Federal National Mortgage (FNMA or Fannie Mae) or Federal Home Loan Mortgage Corp. (Freddie Mac).
The Fed uses them as an intervention measure, helping rates stay low and keep credit flowing.
How Does The Federal Reserve Affect Mortgage Interest Rates Today?
When the Federal Reserve makes changes to its policy by shifting the fed funds rate or purchasing treasury bonds, mortgage rates are undeniably impacted. Throughout most of the pandemic, you may have noticed that mortgage rates were hitting record lows. The purpose of lowering the federal funds rate was to keep the economy moving in a turbulent time.
It’s not surprising that the housing industry greatly benefited from low fed mortgage rates. With the ability to use a lower federal interest rate as a guideline for mortgage rates, lenders across the country were offering borrowers record low interest rates on their home purchases. That low rate environment, combined with other factors, contributed to the rising competitiveness of the housing market in the past year.
Incredibly low interest rates have encouraged home buyers to stay on the hunt for the right home in a competitive market. Additionally, current homeowners looking to refinance could take advantage of dramatic monthly savings due to a significantly lower interest rate attached to their mortgage.
The Bottom Line
The connection between the Federal Reserve and your mortgage interest rate can be complicated. But in general, when the federal funds rate increases, you can expect mortgage rates to rise along with it. And on the flip side, decreases in the federal funds rate should result in lower mortgage rates.
As a borrower, you can’t control the federal funds rate. But you can work on making changes to your credit history that could result in a better mortgage rate. Consider paying off debt, making on-time payments and lowering your credit utilization rate to create a better credit score.
When you are ready to close on a home, shop around for the best mortgage rate. Don’t forget that Quicken Loans offers some of the best free resources out there to help you get the best mortgage rate.