How will the Federal Reserve impact mortgage rates?
Homebuyers sometimes misunderstand how the Federal Reserve affects traditional mortgage rates. The Fed doesn’t actually set mortgage rates. Instead, it determines the federal funds rate, which generally impacts short-term and variable (adjustable) interest rates. This is the rate at which banks and other financial institutions lend money to one another overnight. When the Federal funds lower or increase rates, it becomes more or less expensive for banks to borrow from other banks. This cost is generally passed on to consumers by higher or lower interest rates on lines of credit, auto loans and other short term loans. Traditional Mortgages rates are influenced by a number of factors, with the biggest impact being the buying and selling of government securities such as bonds, supply and demand along with other economic conditions.
Why does it seem that the mortgage rates typically followed the Federal Reserve lowing or increasing rates in the past?
In the past, some of the same reasons the Feds increase or lowered the rates were mainly in part due to the same economic conditions that ultimately affected mortgage rates. Therefore, you would often see the domino effect on mortgage rates. As we all know, this is unprecedented times due to a worldwide pandemic. However, due to the mortgage rates dropping a few weeks earlier, the demand increased to levels where mortgage companies are at full capacity. (supply and demand) Mortgage lenders want to lend to as many clients as possible but also want to deliver the service to properly manage the large amount of volume that was delivered in a very short period of time. Keep in mind this is a 10-3- year note and not a short term decision.
If you would like more detailed information on how Mortgage rates are determined, click on the below link for more details that may be helpful: