The Federal Reserve’s effect on mortgage rates: What to know

The Federal Reserve slashed interest rates to near zero in 2020 in an emergency response to the coronavirus pandemic. The Fed's action was intended to help Americans struggling financially amid the outbreak by making it more affordable to borrow money.

While the Fed doesn’t regulate your mortgage rate, the central bank sets the funds rate to impact the economy. This action indirectly influences the loan rates consumers pay. The Fed kept the key rate near zero during its last meeting, with no forecasted rate hikes through 2023.

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Why the Fed cut rates

The Federal Reserve’s job is to keep unemployment rates low and inflation in check. One of its tools is setting the funds rate. By law, banks must maintain a certain level of cash at their regional Federal Reserve branch to ensure customer withdrawals. If a bank doesn't meet its reserves requirement, a bank with excess funds may provide it with an unsecured loan. The funds rate is the interest the lending bank can charge.

When the Fed decreases the funds rate, banks are encouraged to lower interest rates on short-term loans, stimulating the economy. This step can improve consumer confidence and inspire spending. It may also prompt businesses to borrow money for capital investments or hiring. However, if debt levels or inflation become high, the Fed may raise the funds rate to slow down borrowing.

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How the Fed impacts mortgages

Long-term loans, such as mortgages, are also indirectly impacted by the Fed’s actions. Fixed mortgage rates are tied to the 10-year Treasury rate, which can sometimes be affected by the funds rate. The government bonds, which mature in 10 years, are considered a sign of investor outlook. High demand usually happens during an uncertain economy, as the bonds are considered a safer investment. During this time, the Fed lowers rates because they’re easy to sell to investors. During the past two decades, mortgage rates decreased as yield rates went down.

Fixed mortgage rates can be influenced by outside factors, as well. For example, during a hot seller’s market, such as in 2020, more people are purchasing homes, mortgage lenders may raise mortgage rates to slow down demand. Experts predict the 2021 home market will continue to be strong.

If today's mortgage rates have you interested in the real estate market, you can explore your mortgage rates options in minutes by visiting Credible and get prequalified today. If you were rejected for a home loan in the past and addressed the reasons you were denied, you may be able to get approved if you apply again.

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Or consider a mortgage refinance

Lower interest rates can also be beneficial for homeowners with existing home loans. Depending on your current terms and how far into the repayment process you are, refinancing your mortgage to a lower interest rate can offer significant financial savings. The rates you can qualify for will depend on your personal finance situation and credit score. A lower rate may result in a smaller payment, which can help you pay off your mortgage faster.

The Fed’s actions to help the economy can benefit you personally if you’re ready to buy a home. Homeownership offers several advantages, such as tax deductions, stabilized expenses, and potential appreciation. To find a home loan that’s right for your budget and financial goals, visit Credible, where you can get in touch with experienced loan officers and get your mortgage questions answered.

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