How The Fed Affects Mortgage Rates

Dated: 03/25/2018

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Contrary to popular belief, the Federal Reserve’s Benchmark Federal Funds Rate or “Fed Rate,” does not directly affect mortgage rates. It affects the monetary policy of the government and therefore the monetary policy of banks which set short term lending and mortgage rates. In general, fixed mortgage rates are tied to the government’s 10-year Treasury note.

So what does that mean to you? If you already have a fixed rate mortgage, it does not affect you at all. Your mortgage rate remains the same for the life of the loan. If you have an adjustable rate mortgage (ARM), then your rate will most likely increase when it enters the adjustable period. The Fed Rate influences short term Treasury Bonds, which is how the rates change during the adjustable period. Short term Treasury Bonds include 3-year, 5-year, and 7-year.
The Fed just raised the rate on a quarter of a point to 1.0% on March 15, 2017. This comes after the Fed raised the rate a quarter of a point in December 2016 and raised it from 0.0% to 0.5% in December 2015. The rate had been at zero since the financial collapse of 2007.
The Fed is also expected to raise rates two more times this year to a total of 1.5%. They have also indicated that the Fed Rates will rise over the next two years to 3%. So what does this all mean? Based on the Fed projections, mortgages are at the lowest rates we’re likely to see for a while. If you are shopping for house or thinking about shopping for a house, now is the time to do it!

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