What does the Federal Reserve cutting its target interest rate to near zero percent mean for mortgages?
This is the second emergency rate cut in two weeks and brings the federal funds rate to between 0% and 0.25%. It’s designed to stimulate the economy by making it cheaper for people to borrow money for a mortgage, among other things.
Together with the Fed’s move to buy at least $500 billion in US Treasuries and at least $200 billion in mortgage-backed securities, the actions signal that the Fed puts the economic effect of the coronavirus outbreak on a similar level as the global financial crisis in 2008.
So how will this affect mortgage rates?
Understand that mortgage rates of 0% will likely never happen. The reason for that is a federal fund rate of zero is the fund rate the banks will pay to borrow money overnight. While the Feds meet about 8 times a year, mortgage-backed bonds and securities can actually change over 1,000 times per day. They’re much quicker to act. Mortgages react to the Fed rate cut before it ever happens, but even then a Fed cut might not convince mortgage rates to move lower due to the other factors. Because the term of a loan for an investor who lends the money on mortgage-backed securities is usually 30 years or 15 years, this is vastly different than overnight rates the Fed is lending money at. The result is that the investor is taking on long term lending which comes with a higher risk, and therefore a higher interest rate. Markets typically care much more about how the rate will move in the future. So they’re very focused on the economic realities that are likely to shape future Fed moves. Markets also care quite a lot about any changes in the Fed’s bond-buying plans. And normally when the stock market goes down, you see the bond market get strong as that’s the traditional safe haven for investors. However, recently they’ve pulled money out of the market and into their mattresses instead of the bond market. This is why a lower fed rate doesn’t necessarily equate to a lower interest rate.
Also, creditworthy consumers carry a higher risk than the US Treasury so you’ll end up paying at least a couple percentage points higher as a result. However, mortgage rates are at historic lows and that means the demand is increasing to take advantage of those low rates.
So, should you rush to refinance your current mortgage?
There is no urgency right now because mortgage companies are inundated with applications and so many refinance already in process. As a result of the traffic jam, you’re not likely to find those super-low rates on a normal basis because they are having to mark up the rates to give them a chance to work through that initial tidal wave of demand. There are a lot of things at play in the current economy, but the conditions are very good for mortgage rates to stay low for the foreseeable future and through 2020. Once all the lenders get through the bottleneck of applications, rates should normalize and that’s your opportunity to get your foot in the door if you haven’t already.
To Quote Matthew Graham, Chief Operating Officer for Mortgage News Daily, “The implication is that consumers should not expect a Fed rate cut to subsequently result in a mortgage rate cut, and in fact, that the recent mortgage rate cut did far more to predict the Fed rate cut.”
You can read more about the mortgage rates here. But, if you have any other questions or would like more information, feel free to give us a call or send us an email. We look forward to hearing from you soon.