How Federal Reserve Rate Decisions Impact Mortgages

As mortgage loan originators, we are often the first phone call when customers hear the Fed (Federal Reserve) has “cut rates” during one of its Open Market Committee meetings.

Typically, if the Federal Reserve makes a cut, usually .25% at a time, it is designed to stimulate short term interest rates, encourage investment by businesses and encourage consumers to make durable goods purchases like automobiles, appliances or recreational vehicles. It is also meant to encourage homeowners to dip into home equity for home improvements, debt reduction or possibly college expenses for a child.

Short-term financing rates move in the same direction as the Federal Funds rate. So if you are considering a 3-5 Year adjustable rate mortgage (ARM), you may see a dip in those rates. I like to refer to these downward cuts as a “loosening” of credit.

As for fixed rate loans at 15-30 Year terms, the Federal Funds rate does not always have an impact. They are not directly linked to each other.

However, the rate can have long-term effects on the U.S. Treasury Yield notes as these cuts/increases positively or negatively impact the economy. Mortgages (tied to U.S. Treasury notes) tend to move based on anticipation of what various markets are doing, and the statement the rate cut makes on the state of the economy.

For example, if the stock market is trending upwards, the U.S. Treasury Yield goes up to entice investors to buy. If the stock market falters and the price of equities slips, the yield on those same treasury notes comes down—and so do mortgage interest rates. So the U.S. Treasury Yield is a better indicator of fixed rate mortgage rates.

Currently, 30 Year fixed interest rates are so low, averaging 4.00%, there is not much more room for downward movement. There is a point at which a lender will simply not lower their rate offerings anymore as they cannot profit sufficiently. Since the recent Fed rate cut is minor, it conveys the Fed’s expectations for moderate economic growth in the short-term and limited need for future rate cuts. We do not currently expect an impact on long-term rates.

In 2019, I have seen conventional rates as low as 3.5% and as high as 4.75% (without discount fees/points). The rate for each buyer is determined by a variety of factors like type of loan, credit score, down payment percentage, how long you wish to “lock-in” a rate, occupancy type (primary, secondary or investment home) and even the property type itself (condo or single-family home).

Looking for a real idea of what interest rate to expect if you buy or refinance in the near future? Seek out a Mortgage Broker (as opposed to a bank, credit union or direct lender) so they can shop multiple sources on your behalf. Mortgage Brokers can secure the most competitive pricing you qualify for without you having your credit pulled by multiple sources.

In our era of constant news streaming and multiple sources of information, we as consumers can often feel like we are missing out on a better deal. But take a moment to consider the source of your information. If it is coming from a national Lender, Facebook or TV advertising, the information is skewed to elicit an emotional response. And of course, to pay for their advertising!

Also, consult your local Realtor as they are a great source of knowledge. They know which local Mortgage Brokers in your community can be trusted to offer you consultative advice.

Atlantic Trust Mortgage’s Mark Sherman has been a licensed mortgage broker in Florida since 1989. Davidson Realty is proud to work with Atlantic Trust Mortgage to make the lending process as smooth as possible for customers.

Looking for more information? Contact Mark today at 904-509-8272 or mark@atmfl.com.