Who is “the Fed” and what do they do?
“The Fed” is a nickname used to reference the Federal Reserve, and it’s the nation’s central bank. The people serving at the Fed meet about every six weeks to actively tweak monetary policy and keep these three primary goals in check: to help guide the economy, keep inflation at a reasonable level, and help stimulate job growth.
With the Fed’s overnight interest at a two-year high, current and to-be homeowners are asking themselves “Is this going to affect my mortgage interest rate?” Our answer is yes, most likely, but indirectly.
Interest is the cost you pay to borrow money. It’s also part of your mortgage repayment to your lender. When the Fed raises interest rates, they are not determining what mortgage interest rates will be, but they are determining other rates (like what banks and credit unions charge one another for overnight loans) that can affect the entire economy, including mortgages. It’s often a ripple effect, but it’s not a hard-and-fast rule.
Here are the two biggest Fed factors to consider:
- The Federal Funds Rate: This is the monetary policy “tool” that is used by the Fed, and it sets the interest rate that banks will charge one another to borrow or lend excess reserves overnight, according to Investopedia.
- The 10-year Treasury Note: This is a loan you make to the U.S. federal government, which takes a decade to mature. The note is a type of bond, and it’s the most popular debt instrument in the world, also according to Investopedia. The interest rate on a 10-year Treasury bond does not move in step with the Federal Funds Rate.
One distinction to make here is the Fed does not specifically set mortgage interest rates, but their decisions will impact bonds, which indirectly trickles down to where a mortgage rate lands. Since mortgage rates are determined by many factors, including inflation rates, economic growth, and the labor market, the Fed’s monetary policy factors in, but it’s not the only factor.
How the Fed affects fixed mortgage rates
The primary benchmark for long-term interest, like in a fixed-rate mortgage, is the 10-year Treasury note (also called a T-note). Like how the value of the dollar fluctuates, the T-note will fluctuate as well, and it’s a good indicator of how the economy is performing. Fixed-rate mortgages are tied to the T-note, and when the value of a T-note goes up, fixed-rate mortgage rates also go up. When the T-note goes down, fixed-rate mortgage rates go down.
Low mortgage rates strengthen the housing market, often creating a welcoming impact on the economy.
It’s also because the 10-year Treasury yieldas a big effect on the cost of borrowing money for companies long-term. When companies face more expensive borrowing costs, it can reduce their ability to participate in growth and expansion.
How the Fed affects variable mortgage rates
What if you’re interested in a different kind of mortgage, like one with a variable interest rate? Adjustable rate mortgages are affected by the Federal Funds Rate. Unlike fixed-rate mortgages, your interest rate will float up and down with the market and vary once or twice a year.
If you’re shopping for a mortgage, here’s what to consider
Because the repayment of a mortgage is greatly affected by interest, you need to shop around. Specifically, there are two numbers that need your attention: the interest rate AND the annual percentage rate, or APR. The APR is the average cost of all fees paid by the borrower for the mortgage loan (including mortgage insurance, closing costs, interest, and other fees). The interest rate component only applied to the money that you borrow for your home loan (no fees or closing costs involved).
The bottom line
The Fed’s actions indirectly influence the rates you’ll pay for a mortgage.
If the Fed raises rates, mortgage interest rates are likely to rise. This is only a rule of thumb, though. Consider how mortgage rates go up and down daily, in line with the ebb and flow of the economy. If you pay attention to mortgage rates and the Fed’s actions, you will find that on occasion, the Fed’s decisions and mortgage rates move in opposite directions.
Money can be complicated. If you want to refinance or make a purchase for one of life’s largest transactions, seek a Mortgage Loan Officer. Their professional help will help guide you to finding a loan that makes good financial sense for you. When you’re ready for the next step, Homespire can help.
This is not an offer for a loan or any type of extension. Eligibility for a loan or extension of credit from Homespire Mortgage Corporation is subject to completion of a loan application, credit, income, and employment qualification, and meeting established underwriting criteria. Rates are subject to change without notice based on market conditions. See Loan Consultant for information on program income limits, buyer contribution, area median income, debt requirements, and other application details.