Last month, the Federal Reserve made headlines by cutting interest rates for the first time in over four years, causing quite a stir in the mortgage industry. Homebuyers and those looking to refinance are left wondering what this means for their mortgage rates. While many expect lower rates to follow, the relationship between Fed rate cuts and mortgage rates is more complex than it seems.
In this post we’ll break down how mortgage rates are determined and how the Fed’s actions influence them.
1. The Fed Cuts Rates
While it’s tempting to assume that when the Federal Reserve cuts its rate, mortgage rates automatically drop, the connection isn't that direct. The Fed controls the Federal Funds Rate, which is the rate banks charge when lending other banks money. This rate has a direct impact on short-term interest rates for things like consumer loans, credit cards, and lines of credit.
2. Bond Market and Mortgage Rates
Mortgages are traded as Mortgage-Backed Securities (MBS) on the bond market. Bonds trade based on anticipated inflation, job growth and the economy’s perceived strength.
While bond yields aren't directly tied to the Federal Funds Rate, they are indirectly affected by it. When the Fed adjusts the Federal Funds Rate, it can shift market expectations about economic growth and inflation, which in turn can impact bond yields and mortgage rates. In this sense, while the Fed's actions do play a role in influencing mortgage rates, they are just one piece of a larger puzzle that includes broader economic indicators and investor behavior in the bond market.
3. Borrower-Specific Factors
While economic conditions and the Fed’s policies play a major role, individual borrower factors are also important in determining the mortgage rate you’ll be offered. Some of these include:
Credit Score: Lenders assess your credit score to gauge the risk of lending to you. Borrowers with higher credit scores are typically seen as lower risk and are rewarded with lower interest rates. If your credit score is less-than-stellar, you may still qualify for a mortgage, but the interest rate could be significantly higher.
Loan Type: The type of mortgage loan you choose also impacts your rate. Government-backed loans, such as FHA and VA loan’s rates are impacted less by credit and downpayment than FNMA and FHLMC loans.
Loan Amount & Down Payment: The size of your loan and your down payment can also affect your mortgage rate. A larger down payment usually means a lower rate as it reduces the lender's risk.
4. The Type and Use of Property
Mortgage rates can also vary depending on why you’re buying and the type of property. Investment properties and vacation homes typically come with higher rates than primary residences. Multi-family properties and condominiums also typically have higher rates than single family homes.
Over the past 6 months mortgage rates have come down in anticipation of the Fed cutting rates. If the economy continues to slow, mortgage rates will likely continue to drop in anticipation of additional Fed rate cuts. Its important to remember that the bond market is already moving in anticipation of future Fed moves. Mortgage rates are also moving in advance of Fed moves. It is typically only surprises that will cause immediate mortgage rate movement.
Whether you're looking to purchase a new home or refinance, our team is ready to guide you through the process and take advantage of the current market. Reach out to your local Northpoint Loan Officer today.
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