The Federal Reserve announced a 0.25% interest rate cut at this week's policy meeting on November 7th. The country's central bank previously cut the benchmark interest rate by 0.5% on September 18, the first reduction in more than four years.
Over the past two and a half years, the Fed's interest rate hikes have had a negative impact on the housing market, pushing mortgage rates out of reach.
Although lower interest rates are better than higher rates, prospective home buyers shouldn't expect mortgage rates to fall anytime soon. The Fed does not directly set mortgage interest rates. Monetary policy decisions serve as a guide for banks and lenders across the United States.
Because investor expectations are the primary driver of changes in mortgage rates, interest rates tend to move before the Fed, rather than after it.
“The market currently has an assumption about how much rate cuts will ultimately occur, and that assumption is priced into today's long-term rates,” said Matt Graham of Mortgage News Daily. .
Mortgage rates should ease over the next 18 months, but rates tend to be volatile and could go up or down on a daily basis regardless of what the Fed does. The overall state of the economy will play a large role in determining when and how much interest rates will be cut.
“The outlook for mortgage rates will depend on future labor market and inflation data, as well as whether the Fed signals future rate cuts,” said Odeta Cusi, deputy chief economist at First American Financial Corporation. Probably.''
Here's what you need to know about how government interest rate policy affects mortgage rates.
What does the Federal Reserve do?
The Federal Reserve was created by the Federal Reserve Act of 1913 to set and oversee monetary policy in the United States to stabilize the economy. It consists of 12 local banks and 24 branch offices and is governed by a voting board of directors from the Federal Open Market Committee. The FOMC sets the standard interest rate at which banks lend and borrow money.
In an inflationary environment, the Fed uses interest rate hikes to make borrowing costs prohibitive and slow economic growth. Banks typically pass interest rate hikes on to consumers in the form of higher interest rates on long-term loans, including mortgages. When the economy is in a slump or slump, the Fed lowers interest rates to stimulate consumer spending and promote growth.
Read more: How employment data will impact mortgage rates in 2024
How does the Fed affect mortgage rates?
The Federal Reserve does not directly set mortgage rates, but it does influence them by changing the federal funds rate (the interest rate that banks charge each other for short-term loans). The Fed's decisions change credit prices, creating a domino effect on mortgage rates and the broader housing market.
“When the Fed raises rates to slow the economy, rate-sensitive sectors like tech, financials and housing are the first to be hit,” said Alex Thomas, senior research analyst at John Burns Research & Consulting. It is common to receive it.”
It's important to keep an eye on the Fed's actions. The Fed's decisions affect your money in many ways, including the annual interest rate on your credit cards, the yield on your savings account, and even your stock market portfolio.
Read more: What inflation data means for mortgage rates
How many times will the Fed cut interest rates in 2024?
So far, the Fed has cut rates twice in 2024. This year's next policy decision is scheduled to take place on December 18th. A summary of economic forecasts shows the Fed is planning another 0.25% rate cut, but that could change at any time.
If a number of favorable economic indicators are obtained in the future, the Fed may change its rate cut plans.
Mortgage rates are expected to fall in 2025, but the process will be slow. It is unlikely that 30-year fixed mortgage interest rates will fall below 6% any time soon.
What factors affect mortgage interest rates?
Mortgage rates fluctuate for the same reasons as home prices: supply, demand, inflation, and even employment rates. Additionally, the individual mortgage rate you qualify for is determined by personal factors such as your credit score and loan amount.
Economic factors that affect mortgage interest rates
Policy changes by the Fed: When the Fed adjusts the federal funds rate, it has ripples through many aspects of the economy, including mortgage rates. The federal funds rate affects how much it costs banks to borrow money, which in turn affects the amount banks charge to benefit consumers. Inflation: Generally speaking, when inflation is high, mortgage interest rates tend to be higher. Inflation reduces purchasing power, so lenders charge higher interest rates on loans to cover their losses and protect their profits. Supply and demand: When demand for mortgages increases, lenders tend to raise interest rates. The reason is that lenders have a limited amount of capital to lend in the form of mortgages. Conversely, when demand for mortgages is low, lenders lower interest rates to attract more borrowers. Bond Market: Mortgage lenders lock fixed interest rates, such as fixed-rate mortgages, to bond rates. Mortgage bonds, also known as mortgage-backed securities, are bundles of mortgage loans sold to investors and are closely related to the 10-year Treasury. High bond interest rates reduce the value of bonds in the markets where investors buy and sell securities, causing mortgage interest rates to rise. Other economic indicators: Investor confidence, employment patterns and other aspects of the economy that affect consumer spending and borrowing also influence mortgage rates. For example, strong employment data or a strong economy may indicate increased demand for housing, which could put upward pressure on mortgage rates. When the economy slows and unemployment is high, mortgage rates tend to be low.
Personal factors that affect mortgage interest rates
Specific factors that determine a particular mortgage interest rate include:
Is now a good time to take out a home loan?
Timing is everything in the mortgage market, but you can't control the Fed's actions.
Comparing terms and rates from multiple lenders to ensure your financial profile is healthy can help you get the best interest rates and terms available.
Regardless of your financial situation, the most important thing when shopping for a mortgage is to make sure you can afford the monthly payments.
“Purchasing a home is one of the biggest financial decisions a person can make,” said Odeta Kusi, deputy chief economist at First American Financial Corporation. Kushi noted that purchasing a home in today's housing market can be financially prudent if you find a home that fits your lifestyle needs and budget.
If the price is high, it's better to wait. “By sitting on the sidelines, potential buyers may be able to continue paying off debt, build credit and save on down payments and closing costs,” she said.
conclusion
When the Fed adjusts the base interest rate, it indirectly affects mortgage rates. The Fed's rate cuts will help improve mortgage rates, but not dramatically or immediately. Mortgage rates also respond to inflation, investor expectations, and the broader economic outlook. Experts expect mortgage rates to decline slowly over the next year.
When shopping for a mortgage, compare the interest rates and terms offered by banks and lenders. The more lenders you meet with, the more likely you are to secure a lower mortgage rate.
