Mortgage Rate VS Fed Rate


Within the mortgage industry, there are a lot of terms you will hear and might not understand what they really mean. One of those terms is the fed, or the federal funds rate. Many people often assume that if the fed rate drops the mortgage rates also drop.

In reality, there have been many instances where the fed rates increased or decreased and the mortgage rates moved in the opposite direction. Sometimes the fed increased and mortgage rates still went down, and vice versa.

If the Fed Rate is not the Current Mortgage Rate, What is it?

The first thing you need to understand about the fed rate is that it is not the same as your mortgage rate. It is a short-term rate or the rate for loans with up to a one day term. Home loans do not fall into this category.

The target rate for federal funds is set by the Federal Open Market Committee. The FOMC typically meets less than 12 times per year. Mortgage rates change daily, sometimes even as often as two or three times a day.

The fed may have an impact on mortgage rates in the long-term, though. Periodically the fed will use Quantitative Easing, or QE. QE is a process where the fed initiates large bond buying. They sell off existing government bonds in order to inject money directly into the economy and expand economic activity.

The exception to the rule is Adjustable Rate Mortgages, or ARMs, which usually move in the same direction as the federal funds rate.

So, what DOES have an effect on mortgage rates?

What you may be starting to understand is that home loan rates are not majorly impacted by the changes in the fed rate. The bond market has a far greater daily impact.

Bonds are bought, sold and traded daily. When the bond market is stronger, mortgage rates are lower. This is why QE will affect mortgage rates. As the fed sells bonds, the bond market gets stronger. With the purchase of federal bonds going up, mortgage rates go down. The more bonds the fed is able to sell off, the lower the rate will be.

What does this all mean for me?

The important thing to remember is that the fed rate is not the same as the mortgage lending rate.

If you already have a mortgage, I can look at the current mortgage rate and together we can decide if now is a good time to refinance your home loan.

If you are in the market for a new home, the best thing to do right now would be to apply for the loan. Once you have pre-approval, we can look at the numbers and figure out the best interest rate to make the loan work for you, and when the mortgage rate reaches that number, we will lock in your loan.

If you still have questions about how the bond market affects mortgage rates, or if you are ready to apply for a home loan, give me a call today: 303-818-0699

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