How the Fed’s Interest Rate Cut Could Impact Mortgage Rates
On Wednesday, the Federal Reserve announced Third interest rate cut in 2024. When the Federal Reserve pivots to cutting interest rates this fall as inflation cools, many potential homebuyers think mortgage interest rate Will come down immediately.
but mortgage interest rateThere is always volatility, driven by investor expectations and the bond market. The Fed does not directly set home loan interest rateeven as its monetary policy decisions help guide banks and lenders across the country.
central bank’s Economic Forecast SummaryThe outlook for interest rates in the coming months was outlined, indicating that the Fed still plans to cut interest rates next year. However, given the stubbornly high inflation data and expectations that price pressures will remain high, there may only be two 0.25% interest rate cuts in 2025.
“We still think we’re on track to cut rates, but that’s going to depend on the data,” Fed Chairman Jerome Powell said in a post-meeting speech on Wednesday.
Unfortunately for potential homebuyers, this forecast could put upward pressure on bond yields and mortgage rates in the near term. Nicole RuthSenior Vice President of the Rueth team powered by Liquid Mortgage.
Here’s information about how government interest rate policy affects mortgage interest rate.
What does the Fed do?
The Federal Reserve is made up of Federal Reserve Act of 1913 Sets and oversees U.S. monetary policy to stabilize the economy. It consists of 12 regional banks and 24 branches and is governed by a Board of Governors, which are voting members of the Federal Open Market Committee. The Federal Open Market Committee (FOMC) sets the benchmark interest rate for bank lending.
In an inflationary environment, the Fed uses raising interest rates to slow economic growth and make borrowing more expensive. Banks often pass on interest rate increases to consumers in the form of higher interest rates on long-term loans, including home loans. When the economy enters a recession or downturn, the Federal Reserve lowers interest rates to stimulate consumer spending and drive growth.
Read more: How 2024 Jobs Data Will Impact Mortgage Rates
How does the Fed affect mortgage rates?
The Fed does not directly set mortgage rates, but it affects them by changing the federal funds rate (the interest rate banks charge each other for short-term loans). The Fed’s decision changes credit prices, which has a domino effect on mortgage rates and the broader housing market in the long term.
“When the Fed raises interest rates to slow economic growth, rate-sensitive sectors such as technology, financials and housing are often the first to feel the impact,” he said. Alex ThomasSenior Research Analyst at John Burns Research & Consulting.
It’s important to monitor the Fed’s actions. Its decisions can affect your money in a variety of ways, including your credit card’s APR, your savings account’s yield, and even your stock market portfolio.
What’s the prospect of Fed rate cuts and mortgage rates?
If the Fed implements further interest rate cuts in 2025, Mortgage rates should gradually fall. However, the timing of rate cuts and the economic data we get between each policy meeting will determine how quickly (and by how much) mortgage rates fall.
The next administration’s economic policies may push the Fed to abandon easy interest rates. President-elect Donald Trump’s Tax Cuts and Tariff Proposals That could spur demand, increase deficits and push up inflation, which would incentivize the Fed to keep borrowing rates higher for longer.
Powell said it was too early to tell how Trump’s economic agenda and a Republican-led Congress might change the way the central bank adjusts interest rates, citing only the need to proceed with caution. But experts said the central bank may give up cutting interest rates at its first meeting of 2025 on January 28-29, delaying further policy adjustments until at least March.
While there’s still a lot of uncertainty, 30-year fixed mortgage rates are hard to change fell below 6% There is no weak economic data and continued interest rate cuts from the Federal Reserve.
What factors affect mortgage rates?
mortgage interest rate House prices fluctuate for many of the same reasons why house prices fluctuate: supply, demand, inflation, and even employment rates. Additionally, the personal mortgage rate you qualify for depends on personal factors, such as your credit score and loan amount.
Economic factors that affect mortgage rates
- Fed policy changes: When the Fed adjusts the federal funds rate, it spreads to many aspects of the economy, including mortgage rates. The federal funds rate affects the cost of borrowing money for banks, which in turn affects the profitability fees banks charge consumers.
- inflation: Generally speaking, when inflation is highmortgage rates tend to be high. As inflation erodes purchasing power, lenders set higher lending rates to cover losses and ensure profits.
- supply and demand: When demand for mortgages is high, lenders tend to increase interest rates. The reason is that lenders only have so much capital to lend out in the form of home loans. Conversely, when demand for mortgages is low, lenders will significantly lower interest rates to attract borrowers.
- bond market: A mortgage lender pegs a fixed interest rate (such as a fixed-rate mortgage) to the bond interest rate. Mortgage bonds, also known as mortgage-backed securities, are bundles of mortgages sold to investors and are closely tied to the 10-year Treasury note. When bond interest rates are higher, the bonds are worth less in the market where investors buy and sell the securities, causing mortgage rates to rise.
- Other economic indicators: Employment patterns and other aspects of the economy that affect investor confidence, consumer spending and borrowing also affect mortgage rates. For example, a strong jobs report A strong economy could indicate increased demand for housing, which could put upward pressure on mortgage rates. When the economy is slowing and unemployment is high, mortgage rates tend to be lower.
Personal factors that affect mortgage rates
Specific factors that determine your specific mortgage interest rate include:
Is now a good time to shop for a mortgage?
While timing is everything in the mortgage market, you can’t control what the Fed does.
you can get Best prices and terms Make sure your finances are in good health by comparing terms and rates from multiple lenders.
Regardless of your financial situation, the most important thing when shopping for a mortgage is to make sure you can comfortably afford your monthly payment.
“Buying a home is the largest financial decision a person will make,” Kush said. Kush points out that buying a home in today’s real estate market can make financial sense if you find one that fits your lifestyle needs and budget.
If your price is already exceeded, it’s best to wait. “Waiting and watching may allow potential buyers to continue paying down debt, building credit and saving for down payments and closing costs,” she said.
bottom line
When the Federal Reserve adjusts its benchmark interest rate, it indirectly affects mortgage rates. A rate cut by the Federal Reserve will help improve home loan rates, although the cut won’t be significant or immediate. Mortgage rates will also respond to inflation, investor expectations and the broader economic outlook. Experts predict that mortgage rates will slowly decline over the next year.
If you’re shopping for a mortgage, compare the rates and terms offered by banks and lenders. The more lenders you interview, the better your chances of getting a lower mortgage rate.
