Whenever the Fed makes a rate change, we’ll often get asked if or how it will affect home mortgage rates. It’s not an easy answer. There is a relationship between the two, but it is not what most people think. This past week is a great example because even though the Fed announced a rate cut, mortgage rates went up? Why?
The main reason is that the Fed doesn’t actually set mortgage rates. Instead, it determines the federal funds rate, which governs short term transactions.
This rate determines what banks or other financial institutions can lend money to one another overnight to meet the required reserve levels. When the Fed raises or lowers rates, it means that it is more or less expensive for these institutions to lend to one another, and those fluctuations are passed on to consumers in various ways. Typically short term loans, adjustable-rate mortgages, and HELOC’s will follow the fed rate.
The Fed rate, however, doesn’t directly affect long-term rates, which include financial products like 30-year fixed-rate mortgages. Mortgage loan rates are influenced by a combination of signals including the economy, the Fed rate, and inflation, which generally are pegged to yields on U.S. Treasury notes.
Even though mortgage rates may have edged a bit higher after this most recent rate cut, they are still lower than they have been in 4 years, and it is still a great time to buy a home or refinance at the lower rate.
To check current rates, refinance, or get pre-qualified for a home loan, please give Capital Mortgage a call today for a free consultation, and take advantage of the low rates while you can!