Unless you work in finance or follow the stock market, the Federal Reserve may not mean much to you. But if you’re thinking about buying a home or refinancing your mortgage, understanding what the nation’s central bank does is quite relevant to your situation.
That’s because the Fed’s actions can influence the interest rates lenders offer on mortgage loans, which ultimately impacts how much you’re able to borrow and how much your monthly mortgage payment will be. But exactly how does that work?
The Fed’s Role
As the heart of the country’s financial system, one of the Federal Reserve’s biggest roles is setting key interest rates, which have a direct impact on how much it costs to borrow money—including the money people borrow to buy homes.
When the Fed lowers rates, it’s cheaper for banks to borrow money. This trickles down to consumers because banks can then offer lower interest rates on loans, credit cards and other forms of debt, which makes it less expensive for people to borrow money for big purchases like homes. On the flip side, when the Fed raises rates, it can mean higher borrowing costs.
Occasionally, the Fed adjusts interest rates to keep the economy in check. During the COVID-19 pandemic, for example, the bank aggressively lowered interest rates to help to stabilize the economy and encourage borrowing and spending. When the economy recovered, the Fed implemented a series of rate hikes as part of an effort to curb inflation.
Recently, the Fed began cutting rates again, which is generally good news for homebuyers. Lower monthly payments not only make homeownership more affordable, but they also allow buyers to invest in properties that were previously out of their price range.
A Limited Impact?
While a Fed rate cut can signal lower mortgage rates, it’s not a guaranteed correlation. This is because the Fed sets the federal funds rate, which affects short-term interest rates, not rates for 30-year mortgages.
Mortgage rates are more directly tied to the value of mortgage backed securities (MBS), which are pools of home loans packaged and sold to investors. MBS prices themselves are affected by a range of factors, including economic expectations, investor behavior and market conditions.
So far, the effect of the Fed’s rate-cutting on mortgage rates has been mixed. Following the rate cuts, some borrowers have indeed found lower rates and were able to put their homebuying plans in motion or refinance their mortgages at more favorable terms. For other borrowers, rates haven’t dropped enough to influence their decision.
If the Fed continues to cut rates, however, the rates mortgage lenders offer could decrease as well. But again, the effect is not guaranteed. For homeowners and potential homebuyers, this means keeping an eye on a broader economic landscape and the rates lenders are actually offering, not just the moves made by the Fed.
What to Know
If you’re thinking about buying or refinancing a home, you may be wondering whether to wait and see if the Fed will cut rates further before pulling the trigger. However, there are a few reasons why waiting might not be your best bet.
First, there is never a surefire bet on whether rates will go up or down—plus rates typically move higher at a much faster pace than they decline. If you find a rate that works for you now, it might be prudent to lock it in rather than gamble on future decreases.
In addition, real estate tends to appreciate over time. This means the longer you wait, the higher the potential cost of the home you’re eyeing. It’s very likely that increasing home prices could outpace the savings you could get from a slight drop in interest rates.
Lastly, there are other reasons to buy or refinance a home besides rates, and every borrower’s situation is unique. If the numbers make sense and you find a home that meets your needs, or a refinancing opportunity that improves your financial situation, it might be wiser to make your move rather than wait for a “perfect” rate that may never come.
In essence, while the Fed’s actions can affect mortgage rates, they’re just one small piece of the puzzle.
If you’re trying to figure out the best time to buy or refinance, the loan experts at Right By You Mortgage can help. Find a local loan officer near you or email us at inquiries@fidelitybanknc.com] to get started.
