If you’re in the market for a home and you’re looking for the best mortgage you can find, you know that interest rates play a big part in finding your home loan. You’ve also probably been hearing a lot about interest rates going up, particularly related to the Federal Reserve, but you may not be clear on what that means to you. At Cliffco Mortgage Bankers, we’re in the business of helping people get home loans and achieving the dream of home ownership. So we want to let you know how interest rates work and what rising rates may mean to you.
Federal Reserve Rates and Mortgage Rates
According to Investopedia, the Federal Reserve, which is the central bank of the United States, seeks to influence our economy, inflation and employment level through its monetary policy. One of the key methods they use to do this is by setting short term interest rates. They do this by setting a target for the federal funds rate. This is the rate that American financial institutions like banks and credit unions use to lend each other money overnight in order to meet their mandated reserve levels. This is the required amount of cash the institution must have on hand each day as required by federal law.
The Federal Reserve doesn’t directly set interest rates, nor does it set mortgage rates, but it does influence these rates. So let’s take a look at how mortgage rates are set. According to the website, How Stuff Works, the bank that sets the mortgage doesn’t usually hold onto it. Instead it goes into what’s called the secondary mortgage market. In the secondary market, lower mortgage rates are attractive to homebuyers and higher rates are attractive to investors who buy the mortgage on the secondary market. Mortgage rates change often based on this market and the federal reserve rate. The inflation rate has an impact as well.
Impact of Recent Fed Rate Hikes
On June 12 of 2017 the Fed announced its most recent rate hike, when it boosted short-term rates by a quarter percentage point, according to USA Today. It was the third short-term rate hike in six months and many economists are predicting we may see another Fed hike before the end of 2017.
So what has this meant for mortgage rates? According to USA Today, fixed-rate mortgages were barely above 2017 lows at the time of the most recent rate hike. There have been predictions of a gradual rise in mortgage rates, but rates did decrease following a Fed rate hike in March. One reason for this is that the hike was widely expected and mortgage markets had already priced it in, according to CNN. Since the June rate hike, fixed mortgage rates have crept upward and are at their highest point since mid-May and adjustable rate mortgages are at their highest point since March, as of this writing, according to NerdWallet.
While mortgage rates are finally starting to move higher because of the Fed’s monetary policy, there are some factors that could still keep rates down a bit. The rest of the world has yet to catch up to the US economy. Mike Fratantoni, chief economist for the Mortgage Bankers Association told USA Today in June. “Even though the U.S. economy is really looking pretty strong right now, particularly in the job market, the rest of the world is lagging behind,” he said.
“So central banks elsewhere are still aggressively stimulating their economies and keeping their rates low, and that’s acting as a bit of an anchor on longer-term rates.” Fratatoni feels US rates may be held back by foreign rates over the next several years.
Let Cliffco Explain Your Mortgage Options
While the Federal Reserve seems to be strongly favoring interest rate hikes, and that’s having an effect on US mortgages, there may be factors that will slow a mortgage rate hike. If you’re looking for a mortgage, Cliffco Mortgage Bankers can help you discover your options. Contact us today.