Apr 4, 2022
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Unless you’re boycotting the news, you probably heard that the Feds “raised interest rates” in March. That is true but it doesn’t mean what you might think for mortgage interest rates.
When the Feds raise interest rates, they’re raising something called the Federal Funds Rate. The Federal Funds Rate is a short term rate. It’s the rate at which banks lend money maintained at the Federal Reserve to other banks overnight. The higher the federal funds rate, the more expensive it is to borrow money. The federal funds rate is considered the base rate that determines other interest rates and indices in the US economy. For example, when the federal funds rate increases, the prime rate increases. And the prime rate is what determines your interest rate on things like credit cards and home equity lines of credit. So if you carry a balance on your credit cards or you owe money on a HELOC – your interest rate is going up.
But there isn’t a direct correlation between short-term interest rates and long term interest rates like mortgage interest rates. Most mortgages are sold on the secondary market. So mortgage interest rates are determined by the price of mortgage backed securities – what they can be sold for. Mortgage interest rates are influenced by the Fed’s decision to raise or lower rates. But mortgage interest rates increased weeks ago in anticipation of the Feds increasing interest rates.
In fact, what we saw in the aftermath of the Fed’s interest rate decision is that mortgage interest rates actually improved. Mortgage interest rates were prepared for the Feds to increase short term rates by 0.5%. When they decided on a 0.25% increase instead, mortgage interest rates were like, “Awesome Sauce! We can chill out a bit.” And we actually saw mortgage interest rates improve in the few days following the Fed’s decision.
So now you can impress your friends and family at your next soiree with your knowledge of interest rates and Federal Reserve decisions.
If you’d like to know more about where interest rates are headed and how to secure a competitive interest rate on your next home loan, visit my web site or text me at 360-301-7575.
My name is Emily Caryl Ingram. I lead a team of Mortgage Loan Specialists at New American Funding in Port Townsend, WA.