By Melissa Forte-Litscher, NextHome Cornerstone Realty
If you’re thinking about buying a home, understanding how mortgage rates are influenced by the Federal Reserve and other factors can help you decide when to jump in. Although the Fed doesn’t set mortgage rates directly, its policies have a big impact on the rates lenders offer. Let’s break down how this works, what else drives mortgage rates and how to make the best choices if you’re in the market for a new home.
How does the Federal Reserve affect mortgage rates? While the Fed doesn’t set mortgage rates, it does influence them through the federal funds rate—the rate banks charge each other for short-term loans. When the Fed raises this rate to slow down the economy and control inflation, mortgage rates tend to rise. On the flip side, when the Fed cuts rates to stimulate growth, mortgage rates often decrease as well. This ripple effect is especially noticeable in sectors sensitive to interest rates, like housing. Often an anticipation of a rate change impacts the mortgage industry just prior to the actual change in the Fed rate.
In September, the Fed made one larger than expected rate cut, and at least one more is expected this year. Mortgage rates might continue to dip gradually, but big drops aren’t likely. Most experts predict that 30-year fixed mortgage rates will remain between 6 and 7%. So, don’t expect a return to ultra-low rates any time soon.
While Fed policies have a big impact, mortgage rates are also influenced by several other factors like inflation, supply and demand, the bond market, and employment and economic data. Higher inflation typically pushes mortgage rates up, as lenders adjust for decreased purchasing power over time. A strong demand for mortgages also causes rates to rise as lenders work to balance their loan volumes. If demand drops, rates often decrease to attract more borrowers.
Fixed mortgage rates often move in step with the 10-Year Treasury yield, as both compete for investors. When bond yields rise, mortgage rates tend to follow suit. Lastly, a strong economy with high employment often leads to higher mortgage rates, as increased consumer confidence boosts demand for homes. In contrast, a slowing economy can bring rates down as lenders try to entice more cautious buyers.
Although you can’t control the Fed or broader economic trends, you can take steps to improve the rate you’re offered. Try working on things you do have control over, such as improving your credit score, saving for a bigger down payment, comparing lenders to get competitive offers and choosing the right type and term of loan for you. Lenders reward strong credit scores with lower rates. So, it pays to polish up your credit by reducing debt and ensuring timely payments. Putting more money down reduces your loan amount, which can also lower your interest rate. Shopping around for lenders can significantly improve your chances of finding the best rate available.
While fixed-rate loans provide stability, adjustable-rate mortgages (ARMs) may start lower, but carry the risk of increasing later.
With rates stable at current levels, now might be a great time to buy if you’re financially prepared. Even if rates dip slightly in the coming months, waiting for them to reach a “perfect” low can be tricky. And if rates do decrease significantly, you can always refinance later.
Remember, today’s home prices may increase if demand surges. So, if you’ve found a home that fits your budget, moving forward could be a sound decision. However, if you’re feeling priced out by current rates, you can use the extra time to strengthen your credit, save for a larger down payment, or reduce your debt load.
The bottom line is when the Fed adjusts the federal funds rate, it indirectly affects mortgage rates, but it’s just one factor among many. Inflation, bond yields and broader economic trends also influence mortgage rates and can drive rates up or down. To put yourself in the best position possible when purchasing a home, focus on building a strong financial profile and shop around to find the best terms possible. Buying a home is a big commitment, and securing a rate you’re comfortable with will help ensure you’re financially confident as you step into homeownership. If you’re considering buying now or just want to prepare, I can help you find a good local lender from the many options in our area. Once your financing is secured, we’ll find your NextHome.
Remember, I’m at your service. Call or text me at (850) 496- 7444 or email Melissa@NextHomeCornerstone.com. Visit destin-fwbrealty.com on the web.
