BUYING A HOME
by Craig Wales
|
3 min read
You own a home and are thinking of refinancing your mortgage, or perhaps you are looking to buy your first home . You’ve seen headlines about how the Federal Reserve (commonly known as the Fed) may change the federal funds rate, and you know there’s a correlation between what the Fed does and the mortgage rate you can qualify for. Problem is, you’re not sure what the connection is.
Here’s what you need to know regarding eight common questions about mortgage rates, the Fed and you.
Created in 1913, the Federal Reserve is the central bank of the United States. It helps ensure the country has a stable monetary system. As its name implies, the Fed is part of the federal government, and it reports to Congress, which originally created the Fed.
The Federal Open Market Committee (FOMC), which is a unit of the Fed, meets eight times a year to set monetary policy in the United States. These gatherings are the Fed meetings you hear so much about on the news. During these meetings, the board of governors – led by Fed Chair Jerome Powell -- can raise, lower or leave unchanged the federal funds rate. The governors are guided principally by the goals of maximum unemployment and modest inflation.
Specifically, the federal funds rate is what commercial banks use to lend and borrow from each other. The rate impacts the long-term outlook of the bond market, which is a driver of mortgage rates.
The press release the Fed issues once the meeting has finished can influence mortgage rates, depending on whether its outlook on the economy is bullish or bearish. If the Fed announces that it sees inflation as a concern, mortgage rates will likely rise. But if the Fed believes the economy is heading for recession, mortgage rates will likely fall.
Definitely. Once the Fed cut rates to ultra-low levels in March 2020 at the onset of the pandemic and announced it would purchase hundreds of billions of dollars of mortgage-backed securities, mortgage lenders cut rates, prompting a refinancing boom across the country. Homeowners quickly locked in lower rates than they had previously to save money on their interest payments.
No. Data from the past half century show that the federal funds rate and average mortgage rate across the land are almost never aligned – and, in fact, usually differ significantly.
For example, the federal funds rate has hovered between 5.25 percent and 5.5 percent for much of 2024. The national average for 30-year mortgage rates, however, has mainly hovered around 7 percent during this time. The yield on a 10-year Treasury note is more closely aligned with mortgage rates – but again, is rarely an exact match. (The yield, which fluctuates during trading days, is the amount of money the U.S. government owes those who buy its Treasury notes.)
In reality, mortgage rates are impacted by many factors, from the appetite for risk lenders possess to the national rate of inflation to an applicant’s credit score and more.
During the Great Recession of 2008-2009 and during the recent pandemic, the Fed bought hundreds of billions of dollars of mortgage-backed securities. These are essentially home loans that are grouped together and bought from lenders as a package. Though the pandemic is quickly receding in the United States, the Fed continues to make those purchases, and it has not set a date for when it will stop.
Why does the Fed react like this when a crisis hits? When the Fed uses its significant purchasing power to buy consumer mortgages, the price of these securities rise, which means mortgage rates fall. When rates fall, more people buy homes and refinance existing homes, which bolsters the economy.
If the Fed raises rates, that means mortgages will be more expensive, making buying a house less appealing for many. With fewer buyers, sellers will likely have a harder time procuring the price they want for their home. On the other hand, if the Fed lowers rates, those buyers who may have been on the sidelines will likely jump in to grab a mortgage at the less-expensive price.
It's nearly impossible to predict what will happen with mortgage rates after a Fed meeting. Remember, it's not just the federal fund rates decision that affects mortgage rates, but also the comments made by the Fed chairman after the meeting. That's why you should talk with your loan officer to see if locking in a rate before this meeting could make sense.
What the Fed decides to do with interest rates during its eight annual FOMC meetings is always big news for the U.S. economy. For those interested in applying for mortgages, it’s always important to understand how this independent government body can impact rates for home loans. And for those who already own a home, it’s worth watching the Fed’s announcements to see if refinancing at a lower rate is possible.*
*Savings, if any, vary based on consumer’s credit profile, interest rate availability, and other factors. Contact OriginPoint for current rates. Restrictions apply.
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OriginPoint's Same-Day Mortgage (aka “FastTrack”) promotion offers qualified customers who provide certain required financial information/documentation to OriginPoint within 8 hours of locking a rate on a mortgage loan the opportunity to receive a loan approval within 1 business day of timely submission of documentation and does not suggest that the borrower will receive funding on the same day as their application submission. For purposes of this offer, documents provided after 1 pm local time or on a weekend or company holiday will be deemed submitted the next business day. OriginPoint cannot guarantee that a loan will be approved or that a closing will occur within a specific timeframe. OriginPoint reserves the right to revoke this approval at any time if there is a change in your financial condition or credit history which would impair your ability to repay this obligation. Read and understand your Loan Commitment before waiving any mortgage contingencies. Borrower documentation and Intent to Proceed must be signed within 8 business hours of receipt. Not eligible for all loan types or residence types. Minimum down payment requirements apply. Self-employed borrowers and Co-borrowers are not eligible. Not all borrowers will be approved. Borrower's interest rate will depend upon the specific characteristics of borrower's loan transaction, credit profile and other criteria. Eligible borrowers who successfully provide all required documentation within 8 business hours will receive a $250 Closing Cost Credit applied at closing, no cash value, and may not be combined with any other Lender promotions, discounts, or concessions. Not available in all states. Restrictions apply. Visit OriginPoint.com/same-day-mortgage for terms and conditions.
**Eligible borrowers must qualify for a "Clear to Close Loan Commitment" ("CTC”). OriginPoint cannot guarantee that a loan will be approved or that a closing will occur within a specific timeframe. CTC is subject to certain underwriting conditions, including clear title and no loss of appraisal waiver, amongst others. Not eligible for all loan types or residence types. Minimum down payment requirements apply. Property must be eligible for an Appraisal Waiver and borrower must opt in to AccountChek for automated income and asset verification. Self-employed borrowers and Co-borrowers are not eligible. Not all borrowers will be approved. Restrictions apply.
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Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Restrictions may apply, contact OriginPoint for current rates and for more information.