Sunday afternoon the Federal Reserve (the Fed, for short) announced a rate cut of 1.00% to the Fed funds rate, leaving the range at 0.00-0.25%. These actions were very publicly communicated in connection with the COVID-19 news.
In addition, the refinance market has been through the roof. How do all these economic and geopolitical events affect mortgages? Read on for answers to our most frequently asked questions.
Does this affect mortgage interest rates?
Changes in the Fed funds rate only very loosely affect mortgage rates in normal markets. In the extraordinary circumstances we’re facing right now, that relationship is even more disconnected. The Fed did not, and actually cannot, cut mortgage rates to near zero.
The Fed also announced Sunday they will begin purchases of Mortgage Backed Securities (MBS). This is directly to provide financial support for consumers, encouraging investment in housing.
What is the Fed funds rate?
The Fed funds rate is the interest rate at which banks can borrow money from one another. This can trickle down to other financial industries, like mortgages. For instance, if the Fed increases the Fed funds rate, and lending between banks and other financial institutions becomes more expensive, mortgage interest rates might increase slightly.
The Fed funds range (currently 0.00-0.25%) is not an equal indicator of mortgage interest rates.
How is the mortgage industry affected by the current status of the economy?
Mortgage loan investors and lenders have already been overwhelmed with refinance activity during the past few weeks (because rates have been at historic lows), and they ultimately determine mortgage rates.
For the foreseeable future – several weeks at the very least – these companies will determine what rates are offered. Those levels will not follow the typical relationships with other debt securities or benchmarks.
Should I refinance my mortgage loan?
In these unique circumstances, we can only recommend that customers work with their loan originators to determine where a refinance provides a financial benefit and to prepare to execute a rate lock as quickly as possible when current rates allow the loan originator the ability to accept, then confirm that rate for them.
Rates will be very volatile from one day to the next. Coordinating closely with your loan originator will be key to a successful refinance transaction.
Should I wait to lock in my interest rate?
Until you lock in your interest rate, we cannot guarantee any rate or price. In a time of high volatility (lots of unpredictable changes), if you’re interested in the rate your loan originator is quoting you, it might be best to lock it in. While there is a great deal of uncertainty, mortgage rates are still at historic lows – now could be the time to make your move.
Find a local home loan expert in your area to discuss your mortgage options or learn more about current market conditions.