How The Federal Reserve Impacts Mortgage Rates
Oct 12, 2017 | Buyer Education
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Understanding mortgage rates can be tricky, especially if you’re a first-time homebuyer. Since you may be living with your mortgage rate for the next 15 or 30 years, it’s essential to ensure you understand rates and how they work before applying for a loan.
What Does The Federal Reserve Do?
The Federal Reserve System (aka “The Fed”), is the central bank of the United States. The Fed is responsible for conducting the nation’s monetary policy by influencing money and credit conditions in the economy. The Fed does not set mortgage rates, but rather supervises and regulates banks and other important financial institutions by setting a federal funds rate (the rate at which depository institutions lend money to each other) to ensure the safety and soundness of the nation’s banking and financial system.
Rising Rates May Mean More Expensive Home Loans
When the federal funds rate increases, it makes it more expensive for banks to borrow. This in turn trickles down to consumers in the form of higher interest rates on credit cards, auto loans and mortgages.
Even a small fluctuation can have significant effects on costs for homebuyers. For example, if you have a $200,000 mortgage at a 4% interest rate, raising the rate just 1% will increase the monthly payment by about $119.
Rising Rates May Drive Home Prices Down
However, there are some instances when rising rates can work in your favor. Since higher interest rates make mortgages less affordable on a month-to-month basis, it sometimes causes home sellers to drop their prices in hopes of attracting potential buyers. So, while increased mortgage rates may deter some buyers, the potential decrease in home prices may help balance the rate increase.
The Bottom Line
The Federal’s goal is to maintain economic stability. When it wants to boost the economy, it’s usually less expensive to take out a mortgage. When it wants to clamp down on the economy, borrowers will pay a higher rate on mortgages.
Apply for a Mortgage Today
Wondering if now is a good time to apply for a mortgage? Be sure to contact the professionals at Home Point Financial today. With multiple branches throughout the United States, we’re happy to answer any questions you may have about the mortgage loan process!