Many expect that the Federal Reserve (FOMC) will reduce the short-term Fed Funds rate later this year. If that does happen the expectation is that mortgage rates will also come down. Some market experts believe that mortgage rates will fall to low to mid 6’s by year-end.
The short-term Fed Funds rate is currently 5.25%-5.5%. This is the interest rate at which banks and other depository institutions lend money to each other, usually on an overnight basis. The law requires banks to keep a certain percentage of their customer’s money on reserve. They earn no interest on the reserves so banks try to stay as close to the required limit as possible without going below the amount required. They lend money back and forth to maintain these levels.
The federal funds rate like the federal discount rate is used to control the supply of available funds for making purchases. This makes money more expensive to obtain. This is to slow the economy and bring down inflation. When the Federal Reserve decreases the federal funds rate, it increases the supply of money.
Fixed mortgage rates are typically set based on the yield of the 10-year Treasury bond. As the Federal Reserve raises short-term interest rates, the yield on the 10-year bond also tends to rise. This puts upward pressure on mortgage rates.
Fed rate hikes don’t have a direct impact on mortgage rates, but investor expectations certainly can.
Fed officials have indicated they are ready to start cutting rates this year. This should allow mortgage rates to fall. In the meantime, the expectation is that mortgage rates will remain near their current levels.
This is where the idea to “marry the house, date the rate” comes in. Once you find that perfect home, you shouldn’t delay your purchase based on current rates. Purchase the home with the expectation that when rates do fall you will have the opportunity to refinance your existing mortgage to take advantage of lower rates.
Keep in mind with the expectation of a future refinance, paying extra costs now to “buy down” the interest rate may not be the best strategy. What you spend on the initial purchase may not afford you any benefit if rates fall and you refinance. In other words, buy the house. Keep costs low on the initial purchase so when the time comes you can take advantage of lower rates by refinancing.
Kerry Gaby
Sr. Mortgage Loan Officer, NMLS 641778
Bell Bank Mortgage
113 South Monroe Street, Tallahassee, FL 32301
Cell 850-567-4144
Fax: 855-475-4950
kgaby@bell.bank
