Mortgage rates are continuously changing based on daily trading activity in the mortgage backed securities market. Much in the way investors buy and sell stock in companies, investors are also buying and selling mortgage backed securities.
You likely heard about the recent rate cut by the Federal Reserve. Let’s explore how the Fed’s rate actions impact mortgage rates, directly or indirectly.
The Federal Reserve’s recent action was of particular importance as it confirmed the consensus opinion of an overall shift in monetary policy. The Fed cut the “Federal Funds Rate” which is the interest rate depository institutions, such as banks, charge each other for borrowing money overnight.
The Fed Funds Rate now stands at 2.25%. This was the first cut after nine straight increases. In December of 2008, the Fed lowered the rate to .25% which is the lowest possible and that is where it stayed until December of 2015 when we had our first increase since 2006. The Fed then steadily increased the rate with another raise in December of 2016, three more raises in 2017 and four more raises in 2018. The mortgage backed securities markets largely shrugged off the increase until 2018 when long term mortgage rates started to follow suit.
The recent cut was widely anticipated and mortgage rates have been dropping throughout 2019. As a result, mortgage rates are now within a whisker of their all-time record lows of late 2012. This, combined with rising property values, have created a historic opportunity for current homeowners to refinance. Millions of Americans can now lock in a lower fixed rate, reduce or eliminate mortgage insurance, use their home’s equity to consolidate higher interest rate debt or even reduce the term of their mortgage.
The good news: now is a great time to purchase a home or refinance your current mortgage!
What is the Fed Fund Rate and How does it impact your wallet
Movements in the Federal Funds Rate typically cause a domino effect that impact various lending products. The fed funds rate affects the prime rate, treasury bonds and various indices that lenders use for loans like credit cards, installment loans, home equity lines of credit (HELOCs) and adjustable rate mortgages (ARMs).
The Fed raises and lowers the fed funds rate in response to the economy. Lowering it can help stimulate the economy when the Fed feels indications show the economy slowing and raising it can help slow down inflation when the economy is expanding.
Any changes the Fed makes to the federal funds rate will not impact your current mortgage if you already have a Fixed Rate Mortgage. However, the recent drop in rates may certainly help if you're thinking about refinancing to lower your payments, reduce your term, consolidate debt or purchase a second home or investment property. The lower rates may also help if you are considering adding a fixed rate home equity loan to fund home improvements, education costs or other investments.
Adjustable-Rate Loans: ARMs and HELOCs
Adjustable Rate Mortgages and Home Equity Lines of Credit share a significant common trait. Both have interest rates that will likely fluctuate significantly over time. As such, both are tied more directly to the actions the Fed takes. A decrease or increase in the fed funds rate and the subsequent likely domino effect will impact the index your ARM or HELOC is tied to. When your rate is due for an adjustment, it is calculated based on a set formula. Most typically, your rate will be calculated based on the index (variable component) plus margin (fixed component). It is important to understand when your loan will be due for an adjustment and how your new rate will be calculated. You can find those terms in the final disclosures you received at settlement or closing.
What should you be doing?
If you currently have a fixed-rate mortgage, the changes in the fed fund rate won’t impact your mortgage payment. However, it is a great time to consult your trusted mortgage professional for an overall checkup to see if there is a benefit to be gained from refinancing.
If you currently have an ARM or HELOC loan, you may want to consult with your Mortgage Banker to see if now is the right time to lock in a Fixed Rate Mortgage.
Freddie Mac publishes an average of 30 year fixed rate mortgages (http://www.freddiemac.com/pmms/pmms_archives.html). The historic average for a 30 year fixed rate mortgage since 1971 is over 8%. The current average stands at 3.77%. Today’s rates represent a savings of over 50% against the historic average. Who doesn’t love 50% off?
A simple 5 minute phone call may prove to save you a fortune!