The Feds & Mortgage Rates…And How They Are Connected
By: Maureen Griffin – Tara Stark Real Estate Group
Have you wondered who “The Fed” is and what rate are they setting? Who are those mysterious people who seem to control our economy? Here’s a brief overview and a layman’s explanation of how they can affect mortgage rates.
The Federal Reserve System is the central bank of the United States. The five general functions it performs are:
- Conducts the nation’s monetary policy.
- Promotes the stability of the financial system.
- Promotes the safety and soundness of individual financial institutions.
- Fosters payment and settlement system safety and efficiency.
- Promotes consumer protection and community development.
The three key entities of the system are the Federal Reserve Board of Governors, the 12 Federal Reserve Banks, and the Federal Open Market Committee. Congress oversees the Federal Reserve System and the entities.
When we hear the media talking about “The Fed” meeting to discuss rates, it’s actually the Federal Open Market Committee (FOMC), comprised of members of the Board of Governors and Reserve Bank presidents, that analyze data and make recommendations. The Committee adjust interest rates by setting a target for the fed funds rate. This is the rate that banks charge each other for overnight loans known as Fed funds.
How does the fed funds rate affect mortgage rates?
For the long, detailed answer, check out the Overview of the Federal Reserve System. For a blog-worthy answer, here’s the short of it:
According to bankrate.com, “Mortgage rates respond to market forces — specifically, to the needs of bond investors. The Federal Reserve exerts an indirect influence on mortgages.”
Meaning? As the fed funds rate goes up, it is more expensive for banks to borrow money. Banks pass on the increased cost to borrowers. The good news is mortgage rates are the least affected. Auto loans, credit cards and lines of credit rates are more directly tied.
What happened at the latest Fed meeting?
The FOMC decided to leave the federal funds rate alone. Officials acknowledged that “the labor market has continued to strengthen” and that inflationary pressures “remain near 2 percent”. As a result, we have seen mortgage rates remain lower. That is good news for both buyers and sellers! For buyers it means they can afford more home than if rates increased, for sellers, it means the market share for their home remains larger.
Will rates go up or down? Should I buy/sell now or wait?
Both of those questions have one simple answer; nobody has a crystal ball, we know what the market is now, and knowledge is power. Leaving the largest purchase of our lives up to speculation is risky. Knowing for certain what the interest rate is on a 30-year mortgage and what your monthly payments will be today, allows you to get into the right house. Most importantly, get a pre-approval letter now, while you know rates are lower. Parker, Hood and Erath Counties are healthy housing markets. Having a strong pre-approval letter in your hand gives you negotiation power. Sellers now is the time to list with a real estate professional who repeatedly demonstrates getting top market-driven prices for their listings.