(read this to the end – see for your self)
The news about the Federal Reserve and the Fed Funds Rate is often touted as a reason to anticipate increased mortgage interest rates. As with much of the media, “news” can be manipulated to stimulate emotional reactions from joy to fear. The fear in this case would be of increasing interest rates.
What actually happens when the “Fed” raises the ‘Fed Funds Rate’? Well, those rates apply to funds that banks borrow from the Federal Reserve for periods less than 90 days, but longer than one day. Raising the rate by .25% on banks does not necessarily affect mortgage rates at all.
The Federal Reserve serves an important function in the United States – insuring deposits from bank default (within established limits) and monitoring and controlling monetary policy in hopes of maintain a stable economy with limited fluctuation. Monetary policy is complex and very carefully monitored by financial institutions and corporations.
Borrowing money to purchase a home typically falls under the term, mortgage. Mortgages consist of two components – principal and interest. While we all know about principal, the interest component often seems like hocus pocus in a black box. Interest is the amount that lenders charge for the privilege of lending money.
Because mortgages are typically a long-term commitment on the part of the lender, economic projections are used to set prevailing interest rates. Lenders look at the risk of inflation and the potential opportunity cost of leaving their money at a set rate for a prolonged period of time.
Mortgage interest rates are typically affected by long term bond yields and the 10-year Treasury bills. Obviously, every aspect of the monetary markets trickle down to affect interest rates, however, mortgage rates are not as sensitive to the “Fed Rate” as they are to the Treasuries or Bond Yields.
Why does this information matter to you? You are barraged by offers, threats, and disinformation to act “quickly” to refinance or to buy now. Yet, the reality is that mortgage markets are more insulated than reflected in the news.
However . . . depending on your sensitivity to rate fluctuations, a small move in mortgage interest can affect mortgage qualification. The best solution is to work with a knowledgeable lender who can guide you with correct information with which you can make good decisions.
If you are thinking of buying or refinancing, we have an excellent list of lenders who have worked for our clients who produce loans on time and on budget. Call us today.