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How Lower Fed Funds Rate Affects Mortgage Rates

Point of Interest

Fluctuations in the Federal Reserve target rate have wide-reaching ramifications for mortgage loans.

Lowering the Fed funds rate affects many things, including mortgages. It does this by encouraging banks and lenders to decrease the interest rate on loans and expand the number of loans they provide. In simple terms, lowering the Fed funds rate increases the supply of available money to banks that they can earn interest on, making it possible for them to offer lower interest on loans without losing as much net interest gain as they otherwise would.

Mortgage loans come in different types. One type of particular interest to people is the VA loan, a home loan backed by the Department of Veteran Affairs, which doesn’t require a down payment when purchasing a home. This kind of loan can make it easier for people to buy a home while the Fed fund rates are low, even if they don’t have the cash available for a down payment. VA loans are available to active service members and veterans.

What are Fed funds rates?

Fed funds rates are defined as “…the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight.” Reserve requirements refer to the fact that all banks are required to reserve some of their money as a guarantee for their customers, making sure that account holders will have immediate access to money when requested.

The Federal Reserve uses the Fed funds rates to intervene in the economic system to increase stability, especially in times of crisis, as is being seen during the coronavirus pandemic. For instance, they have lowered the Fed funds target rate, which reduces the interest rate at which banks borrow money from each other to meet their Fed funds reserve requirements and leads to banks and lenders offering lower interest rates for their customers.

Lowering the Fed funds rates provides the banks with more money to work with, making it feasible for them to loan money at a lower interest rate. By increasing the availability of loans in this way, the Federal Reserve is encouraging a heightened movement of money through the economy, through an increase in loans coupled with a decrease in the risk of loans as captured by interest rates (the lower the interest rate, the less likely a loan is to be defaulted on).

Why does the Fed change interest rates?

Interest rates are one of the Federal Reserve’s primary tools for stabilizing and preserving the economy’s health. Normally, it is often a method of controlling inflation. Increasing interest rates reduces the free movement of money and counters inflation while lowering the rates frees up money and stimulates the economy. The Federal Reserve aims for an inflation rate of 2% over time. This policy is designed to optimize the staying power of the American dollar and high rates of employment. During a crisis, such as the coronavirus pandemic, this goal has become tricky, if not temporarily unsustainable.

Beyond the minor alterations to Fed fund rates that occur in regular times, the Federal Reserve can alter the Fed fund rates in response to an economic crisis. By lowering the Fed funds target rate and freeing up the movement of money, the Federal Reserve is making it easier for businesses to avoid collapse during a time when the financial market is otherwise paralyzed. When loans are more affordable and available, they become a more viable way for businesses to avoid bankruptcy during an economic crisis of this nature. These loans will likely go towards covering costs of operation and employee wages during a time when actual paying business is at an extreme low. If affordable loans can sufficiently bolster lowered profits, then the companies can stave off bankruptcy and layoffs.

How do lower Fed funds rates affect mortgage rates?

This lowering of the Fed funds rate has multiple effects upon mortgage rates. Many experts expect mortgage rates to take a dip, of varying degrees, while the Fed target rate remains low. When the Federal Reserve lowers the Fed funds rates, it increases the amount of money that banks can loan and earn interest on, because it reduces the rate of interest at which banks lend money to each other to meet their reserve requirement. In simpler terms, banks have cheaper access to funds and can loan money at a lower rate to a higher number of people.

How do lower Fed funds rates affect consumers?

For homeowners, the lowering of the Federal Reserve target rate can lead to the opportunity to refinance a home and end up with a lower interest rate on their mortgage loan. For people considering buying a home, the lowered Fed rate can make it easier and cheaper to obtain a low-interest mortgage. Even a couple of percentage points difference in mortgage interest rates can reflect hundreds of dollars difference in monthly mortgage repayments. These historically low Fed fund rates can create an excellent time for new homeowners to emerge and take advantage of lowered interest rates on mortgage loans.

Should I refinance my loan with lower interest rates?

Knowing when to refinance a mortgage can be tricky, but when the Federal Reserve lowers its target rate is an excellent time to consider it. However, there are numerous factors and costs that go into the refinancing process. If you can achieve an interest rate reduction of one or more percentage points on your mortgage, you have the finances to fund the refinancing process and you aren’t planning to sell your home in the near future, then financing can be a smart move.

For example, if you have a home valued at $200,000, and you want to obtain a home loan for it, the monthly payments at 6% interest will be $1,000. With a 4% interest rate—just two points lower—the monthly payments on that loan would be $667.

Now, if you were refinancing a mortgage with $200,000 left on it, that could achieve a lower interest rate, but it would involve upfront costs. These costs include mortgage application fees, loan fees, insurance fees, property fees and closing fees. In this case, it can be useful to get a tally of the fees and costs from the bank you’re considering and then calculate how much money you would save on the lower mortgage rate in comparison to the amount needed to spend to initiate the refinancing of your mortgage. If the amount saved on interest is significantly higher than the amount spent on refinancing, it can be a good idea to refinance.

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Mortgage Interest Rates Today, June 8, 2020 | Key rates mixed

Mortgage rates moved in different directions today. The average for a 30-year fixed-rate mortgage was flat, but the average rate on a 15-year fixed ticked up. On the variable-mortgage side, the average rate on 5/1 adjustable-rate mortgages tapered off.

Rates for mortgages are constantly changing, but they remain much lower overall than they were before the Great Recession. If you’re in the market for a mortgage, it may be a great time to lock in a rate. Just don’t do so without shopping around first.

30-year fixed mortgages

The average rate for the benchmark 30-year fixed mortgage is 3.52 percent, unchanged since the same time last week. This time a month ago, the average rate on a 30-year fixed mortgage was lower, at 3.51 percent.

At the current average rate, you’ll pay a combined $450.16 per month in principal and interest for every $100,000 you borrow.

You can use Bankrate’s mortgage calculator to get a handle on what your monthly payments would be and see what the effects of making extra payments would be. It will also help you determinehow much interest you’ll pay over the life of the loan.

15-year fixed mortgages

The average 15-year fixed-mortgage rate is 2.87 percent, up 3 basis points over the last seven days.

Monthly payments on a 15-year fixed mortgage at that rate will cost around $684 per $100,000 borrowed. Yes, that payment is much bigger than it would be on a 30-year mortgage, but it comes with some big advantages: You’ll save thousands of dollars over the life of the loan in total interest paid and build equity much faster.

5/1 ARMs

The average rate on a 5/1 adjustable rate mortgageis 3.19 percent, falling 6 basis points since the same time last week.

These loan types are best for those who expect to sell or refinance before the first or second adjustment. Rates could be substantially higher when the loan first adjusts, and thereafter.

Monthly payments on a 5/1 ARM at 3.19 percent would cost about $432 for each $100,000 borrowed over the initial five years, but could climb hundreds of dollars higher afterward, depending on the loan’s terms.

Where rates are headed

To see where Bankrate’s panel of experts expect rates to go from here, check out our mortgage interest rates forecast.

Want to see where rates are at this moment? Lenders across the nation respond to Bankrate.com’s weekday mortgage rates survey to bring you the most current rates available. Here you can see the latest marketplace average rates for a wide variety of purchase loans:

Current average mortgage interest rates
Loan typeInterest rateA week agoChange
30-year fixed rate3.52%3.52%N/C
15-year fixed rate2.87%2.84%-0.03
30-year fixed jumbo rate3.61%3.63%-0.02
30-year fixed refinance rate3.61%3.62%-0.01

Should you lock a mortgage rate?

A rate lock guarantees your interest rate for a specified period of time. It’s common for lenders to offer 30-day rate locks for a fee or to include the price of the rate lock into your loan. Some lenders will lock rates for longer periods, sometimes for more than 60 days, but those locks can be pricey. In today’s volatile market, some lenders will lock an interest rate for only two weeks to avoid unnecessary risk.

The benefit of a rate lock is that if interest rates rise, you’re locked into the guaranteed rate. Some lenders have a floating-rate lock option, which allows you to get a lower rate if interest rates fall before you close your loan. In a falling rate environment, a float-down lock could be worth the cost. Because mortgage rates are not predictable, there’s no guarantee that rates will stay where they are from week to week or even day to day. So, if you can lock in a low rate, then you should do so rather than gamble on interest rates falling even lower.

It’s important to keep in mind: During the pandemic, all aspects of real estate and mortgage closings are taking much longer than usual. Expect the closing on a new mortgage to take at least 60 days, with refinancing taking at least a month.

Why do mortgage rates move up and down?

Mortgage rates are influenced by a range of economic factors, from inflation to unemployment numbers. Typically, higher inflation means higher interest rates and vice versa. As inflation rises, the dollar loses value, which in turn drives off investors for mortgage-backed securities, causing the prices to fall and yields to climb. When yields climb, rates get more expensive for borrowers.

Generally speaking, when the economy is strong, more people buy homes. That drives demand for mortgages. Increased demand for mortgages can cause rates to increase. The opposite is also true; less demand can lead to lower rates.

Current mortgage rate landscape

The current mortgage rate environment has been unstable because of the coronavirus pandemic, but generally rates have been low. Mortgage rates are rising and falling from week to week, as lenders are inundated with forbearance and refinance requests. In general, however, rates are consistently below 4 percent and even dipping into the mid to low 3s. This is an especially good time for people with good to excellent credit to lock in a low rate for a purchase loan. However, lenders are also raising credit standards for borrowers and demanding higher down payments as they try to dampen their risks.

Methodology: The rates you see above are Bankrate.com Site Averages. These calculations are run after the close of the previous business day and include rates and/or yields we have collected that day for a specific banking product. Bankrate.com site averages tend to be volatile — they help consumers see the movement of rates day to day. The institutions included in the “Bankrate.com Site Average” tables will be different from one day to the next, depending on which institutions’ rates we gather on a particular day for presentation on the site.

To learn more about the different rate averages Bankrate publishes, see “Understanding Bankrate’s on-site rate averages.”

Shopping for the right mortgage lender? See reviews of lenders nationwide.

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7 Costs That Will Decline In Retirement

Retirees have an opportunity to save money on these expenses.  Many people dream of retiring early, but hesitate to make the jump because they are worried about losing the security of incoming paychecks. But retirement might not be as expensive as you think. Some expenses are much higher for working people than retirees. Here are some costs that are likely to decline in retirement:

You don’t have to buy work clothes anymore.

There’s no need to get dressed up once you no longer report to an office. You probably won’t need to buy ties or expensive suits anymore, and there’s no reason to dress to impress. Instead you can switch to the likely cheaper clothes you feel most comfortable in.

Many work-related costs will disappear.

Your long commute and the associated transportation costs will be gone in retirement. Overpriced sandwiches are out too because you will actually have time to make the sandwiches instead of buying an overpriced combo just to hang out with a colleague in an attempt to fit in.

Stuff will wear out more slowly, and you won’t have to replace it as often.

You’ll put fewer miles on your car once you eliminate your commute, and your expensive clothes will stay nice longer because you’ll likely wear casual clothes most of the time. Even your personal laptop could last longer because you aren’t banging away at each key doing extra work at home on evenings and weekends.

Less income means lower taxes.

Those with high incomes often pay a higher income tax rate. If your income is lower in retirement than your current salary your tax bill will decrease.

Time to improve your health.

With the added free time, you will finally have time to exercise in retirement. But even the couch potatoes will benefit from less job-related stress because retirees typically get to set their own deadlines.

Time to negotiate.

Working people often pay more than they need to for things to save time. Retirees have time to search for the best deal and negotiate in order to get the best possible price. For example, my medical bills often contain errors. The reason almost always boils down to someone punching in the wrong code, which is easy to fix. Workers may be too consumed to investigate, but retirees should have plenty of time to find someone who can correct the problem.

Avoid peak travel premiums.

Many workers do their traveling and leisure activities during the same busy weekends and holidays. But why pay full price in retirement when you can potentially go to events or vacation any day throughout the year? Visiting places during the week or traveling during off-peak times that aren’t school breaks and major holidays can save you money and lead to a better and less crowded experience.

Retirement forces you to look at your expenses, so you are far less likely to throw money away on unnecessary items. While some expenses will go up in retirement, many others will decline or disappear, especially for retirees who take the initiative to cut costs.

March 11th, 2014.

By David Ning

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