How Does The Federal Reserve Affect Mortgage Interest Rates?

If you have taken out a mortgage to purchase or refinance a property, you have probably made an honest attempt to try and foresee the future and predict what may happen to mortgage rates while you were in the mortgage market. This is not an easy task, even for the professionals in the industry who have their eyes on the market everyday. This is because mortgage interest rates do not rely completely on one economic indicator. I know my phone always rings when the local newscast televises the Federal Reserve lowered interest rates that day. This is because consumers mistakenly believe when the Federal Reserve lowers their interest rate, they in turn lower mortgage interest rates, and that is not necessarily true.

The Federal Reserve lowers short term rates like the Federal Funds Rate and overnight lending rates – these are the interest rates that banks charge each other. These rates do affect the prime rate, but do not typically affect the long term rates, such as mortgage interest rates. Why? Basically, mortgage rates fluctuate based on the relationship between the stock market and bonds. The stock and bond markets compete everyday for the same investment dollars. This creates weekly, daily, and even hourly fluctuations that can cause mortgage rates to increase or decrease – sometimes many times in a single day.

If you take a look historically at what happens to mortgage rates when the Federal Reserve lowers the rate it may become easier to understand. When the Federal Reserve lowers their rate the stock market usually rallies because investors feel confident company profits will grow. This takes money away from the bond market and mortgage backed securities, which causes mortgage rates to increase. So, when the mortgage consumer calls to inquire about mortgage rates looking for a decrease in rate after hearing the Federal Reserve lowered the rate, they don’t understand why they recently went up. If you look at the opposite situation where the Federal Reserve raises their rate, investors tend not invest into the stock market for fear company profits will fall. They then, typically, choose to invest in the bond market and mortgage backed securities, causing mortgage rates to fall.

Mortgage interest rates fluctuate due to the constant movement of money in our economy, not solely on whether or not the Federal Reserve decides to raise or lower their rate. If you are in the market to buy a home, or refinance your home, you should be mindful of the current market everyday. Certain economic indicators will help you decide when a good time to lock in an interest rate may be. You can also choose to use a mortgage professional to help guide you through this decision. If you need help or guidance with mortgage interest rates, please feel free to call me, Mary Rich at Apollo Home Mortgage Group, to answer your questions and help guide you in the right direction. I can be reached at (218) 725-9000 and will always be willing to lend a helping hand.