Mortgage 101: How the Federal Reserve Affects Your Mortgage
Understanding The Federal Funds Rate
As you may know, the Federal Reserve is the government’s banking arm and the financial institution responsible for overseeing nationwide economic health. While the “Fed” doesn’t set mortgage or other interest rates, it does guide monetary policies which in turn affect these rates. By executing these policies, the Fed guides certain rates higher or lower.
One rate – known as the Federal Funds Rate – is significant in how it can affect mortgage interest rates. The Federal Funds Rate is the interest rate that banks use to lend money to each other on a short-term basis. If you hear about the Fed moving a rate up or down, this is probably it. And when this rate changes, it does tend to have trickle-down effects that cause changes to mortgage rates.
There Are Positives In Both Up And Down Moves
You might be surprised to learn that there can be positive effects for homebuyers whether the Federal Reserve moves up or down. If the Fed raises their rate guidance to a higher rate, it’s possible that mortgage interest rates will follow. However, in many markets, such a move also tends to lead to a decrease in home prices. Conversely, if the Fed lowers their rate guidance, it’s possible that mortgage rates will decrease. This means that if you take a mortgage out when the rate moves down, you will end up paying less in interest over the mortgage amortization period.
In short, there can be positives no matter which way the Fed moves.
Let Your Mortgage Professional Guide You
Staying abreast of the Federal Reserve can be an exhausting effort, especially when all you are interested in is buying a new home. Instead, leave the heavy lifting to your mortgage broker or advisor. They’re able to parse through these changes to let you know what the actual impact on your finances will be.
Whether you’re interested in buying a new home or refinancing your current mortgage, we can help. Contact our professional mortgage advisor team today and we’ll be happy to share current interest rate trends and advice that best suits your financial situation.
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