What Is The Difference Between The Fed Rate & Mortgage Rate?

It seems that every time the Federal Reserve makes a change in interest rates it makes the news. It splashes across headlines and people start to chatter about them. Despite all of the coverage, many people don’t really know what the Federal Reserve interest rate is or how it relates to the mortgage rate that an individual pays on their home.

Covid-19 Federal Reserve Interest Rate Cuts 

The recent spread of coronavirus throughout the United States and the rest of the world has caused economic turmoil the likes of which the world has never seen. It seems that every day there are new and shocking headlines about the impact that the coronavirus has had on the unemployment rate and economic output in general. In response to these headlines, the Federal government has pulled out all of the stops to try to right the market as best as they can during these troubling times. 

The Federal Reserve recently dropped its Fed funds rate to zero percent. This was an emergency measure, and a historic move to boot. The Federal Reserve has rarely held rates so low, and doing so essentially leaves them with no room to cut further should conditions get even worse. 

The question in the minds of most everyday people is how the fed funds rate ties into their mortgage rate. There is an indirect connection, and that makes it important to keep up with what the Federal Reserve is doing. 

Adjustable-Rate Mortgages Benefit The Most 

A fixed-rate mortgage is exactly as the name implies; fixed. It doesn’t move over the years, but this does keep the payment that the borrower pays consistent, and many are willing to pay a slightly higher interest rate now in order to capture that certainty. If rates drop much lower, then they may decide to refinance down the road. 

Someone with an adjustable-rate mortgage is in a position to gain when the fed funds rate drops. Their rate is likely to move in the same direction as the fed funds rate. However, one should note that the fed funds rate doesn’t impact long-term rates like the classic 30-year mortgage. The 30-year mortgage is more tied to the rate being paid on long-term Treasury bonds. 

What Does The Fed Rate Actually Do? 

The Federal Reserve rate determines at which rate banks and very large investors may borrow money from one another. A lower rate means that there is a lot of cheap money floating around in the market. This can be good in the sense that extra dollars in the market can be a big factor in stimulating an economy? However, this can also lead to inflation over time. The battle to find the sweet spot between keeping enough money in the system and keeping inflation at bay is the job of the Federal Reserve. The perfect mixture is often elusive for them though. 

How Are Long-Term Treasury Yields Holding Up Right Now? 

There has almost never been a better time to be a home buyer. Long-term Treasury yields are through the floor. Some of the shortest-term Treasury bonds (such as the 1-month and 3-month bonds) actually produced a negative yield for the first time in American history recently. The longer yields are also suffering as a lot of investors flee away from the stock market and into bonds.

What To Watch For Going Forward 

If anyone out there claims to have a crystal ball that tells them what the Federal Reserve will do next, don’t listen to them. No one can predict with perfect accuracy what the next Fed moves will be. BoulderHomeSource suggests that everyone simply keeps an eye on the moves that the Fed makes in relation to its response to Covid-19. 

Some critical factors that the Fed will watch to make decisions include the number of jobless claims filed and the target inflation rate for the country. These are the factors that they most typically respond to, thought Boulder home source also understands that coronavirus headlines will continue to weigh on a lot of decisions.

At this moment, long-term mortgage rates are below four percent for most borrowers. This means that those borrowers are in a great spot to save themselves some money long term, and that makes it wise for most people to jump in on these rates now while they are still good. 

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