10/16/2024 | Press release | Distributed by Public on 10/16/2024 10:53
If you've been keeping an eye on mortgage rates, you've probably noticed they're heavily influenced by what the Federal Reserve does with its interest rates. But what exactly does it mean for mortgage rates when the Fed raises or lowers its rates? Let's explore that relationship, starting with…
The Federal Reserve (aka the Fed) plays a crucial role in influencing the overall economy by adjusting what's known as the federal funds rate. This is the interest rate banks charge each other to borrow money. While this isn't the same as the interest rate you'd pay on a mortgage, it has a big impact on the cost of borrowing money across the economy, including mortgage rates. Here's the basic breakdown:
However, mortgage rates don't always move in perfect sync with the Fed's actions. Let's take a closer look at how it all works.
The Fed's interest rate decisions can influence mortgage rates, but they don't have a direct, one-to-one relationship.
Mortgage rates are shaped by several factors, including the bond market, inflation expectations, and the broader economy. Here's a breakdown of how these elements interact:
Historically, Fed rate cuts have often led to mortgage rate drops, but the timing and extent of those drops depend on several factors.
However, mortgage rates don't always drop immediately after a Fed rate cut. In 2022, despite rate cuts, inflation concerns kept mortgage rates relatively high.
Year | Fed rate action | 30-year mortgage rate |
2018 | Fed raises rates | 4.54% |
2019 | Fed cuts rates | 3.94% |
2020-2021 | Fed cuts rates | 2.65% |
2022 | Fed cuts rates | 5.5% (due to inflation) |
It's easy to assume that when the Fed lowers interest rates, mortgage rates will drop, too, but it's not always that simple.
While a Fed rate cut often leads to a mortgage rate drop, the timing and extent of the drop depend on several factors.
Factors to consider:
When the Fed raises interest rates, borrowing becomes more expensive across the board, and that usually includes mortgage rates. However, the relationship between Fed rate hikes and mortgage rates isn't always direct.
For example:
Year | Fed rate action | Mortgage rate impact |
2016-2018 | Fed raises rates | Mortgage rates rise steadily |
2019 | Fed pauses rate hikes | Mortgage rates drop to under 4% |
2022 | Fed raises rates | Mortgage rates stay above 5% |
A Fed rate cut often leads to increased housing demand, as lower mortgage rates make buying a home more affordable. In fact, according to Realtor, "for every 1% drop in mortgage rates, roughly 5 million more households become eligible for homeownership."
However, when demand outpaces supply, home prices can rise, which might reduce some of the affordability gained from lower mortgage rates.
So, what should you do if you're in the market for a home and the Fed changes rates? Here are some tips:
At Guild Mortgage, we stay on top of the latest trends in the housing market and the economy. If you're considering buying a home or refinancing, we can guide you through the process and explain how the Fed's interest rate decisions might impact your mortgage options.
Ready to take the next step? Connect with an experienced mortgage loan officer today!
The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction.