WHAT YOU NEED TO KNOW...THE FED RATE VS. MORTGAGE RATES
We have had several requests from both real estate agents and clients asking us to explain the difference between the Fed Funds Rate that went below 1% and 30-year fixed-rate mortgage loans.
The Fed Funds Rate is the interest rate banks charge each other to lend Federal Reserve Funds overnight. The Fed changes these rates to stimulate or slow down the economy among other things. These rates change whenever the Fed votes to change them so a good way to think of this is an adjustable-rate loan that can be adjusted monthly or even daily.
A one-month adjustable-rate loan is never priced the same as a 30-year fixed-rate loan.
30-year fixed-rate loans are bought and sold in mortgage-backed securities or mortgage-backed bonds. These interest rates are set by the amount institutions are willing to pay for bonds. They are influenced by the Fed’s rate but are always more expensive since they are fixed for 30 years and not one day or 30 days. When the stock market is strong, institutions are more apt to purchase stocks with excess funds so interest rates go up to compete for those funds. When stocks go down or are not stable, those investors often leave the stock market and go to a safer investment, mortgage-backed bonds and interest rates go down because they can attract those funds with lower yields, lower interest rates.
When interest rates went to 3% and were rumored to go to the 2% range last week, the bond market did not follow and interest rates went up because the banks reached their capacity and could not handle the volume.
30-year fixed rates move based on what is expected to happen instead of after it happens.
So when the Fed is rumored to cut rates, the 30-year fixed rates improve before that happens. Now, with the Fed reducing rates to stimulate the economy and the Government pouring money into the economy to offset the closing of businesses, the rumor is that these incentives will be short-lived and there could be a strong economy and inflation when the Coronavirus has run its course. This would result in higher interest rates.
As a Mortgage Banker, San Diego Funding and Great Pacific Funding are essential businesses and we will remain open and available to assist you. All of our systems are secure and we already pre-approve, process and fund online. Taking care of our agents and client’s needs will not be interrupted.