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Do Mortgage Rates Go Up Because the Feds Raise Interest Rates?

With the Federal Reserve raising  interest rates (aka Federal Funds Rate) as it did on December 16th, 2015, you may hear that this means mortgage rates will increase automatically.  However, the two are not directly related.  In fact, since the Feds raised the funds rate, mortgage rates have actually dropped significantly.   For instance, prior to the Feds raising the rates, mortgage rates were hovering around 4%.  Now they are around 3.66% as of mid-February.

So if you are a prospective home buyer and see headlines that say the Federal Reserve may raise the rates at their next meeting, no need to panic.  This is because mortgage rates are influenced by the bond market, not the funds rate (See below for further explanation).  If you are just interested in knowing the current mortgage rates, you can monitor them directly at sites like Mortgage News Daily or Freddie Mac that give data on daily rate averages.

For more detailed information on what influences mortgage rates, read on:

Mortgage rates are primarily impacted by the bond market, not the Federal Funds Rate.  Here’s a brief explanation of how the bond market drives mortgage rates.  Specifically, for fixed rate mortgages (Conventional, FHA and VA loans) the mortgage rates are most strongly influenced by the trading of U.S. Treasury bonds/notes.  These bonds/notes are used by the government as a means of paying off U.S. debt.  They are sold at auction by the Treasury Department and are called bonds when issued for 30 year terms and are called notes when issued for 2, 3, 5 and 10 year terms.  However, most people refer to them as bonds regardless of the length of the term they are issued for.

In a nutshell, when investors buy more of these bonds, increasing demand, mortgage rates go down.  Likewise, if demand for buying these bonds decreases, mortgage rates go up.  So while the Federal Reserve raised the rate by .25 of a point, it doesn’t mean mortgage rates will automatically jump up as well.  It could take some time, depending on how the demand for bonds goes in the coming weeks and months.

So what market factors are necessary for mortgage rates to go down?  Typically, when the economy is struggling.  Specifically, when the stock market is unstable and thus is a higher risk for investors, these investors will invest in bonds.  This is because there is lower risk and the federal government guarantees their investment for Treasury bonds.  As more investors move to bond purchasing to avoid the risk of an unstable stock market, the demand for these bonds goes up, which in turn causes mortgage rates to decrease.  Currently, the stock market is a risky endeavor as you may have noticed some fluctuation in your investment accounts.  In these market conditions, investors are moving toward purchasing bonds which in turn keeps mortgage rates lower.  As of the writing of this article on 2/13/16, the average mortgage rate was 3.66%.  So if you have been contemplating as to whether or not you should buy a home this year, these low interest rates put you at an advantage as you can get more home for your money.  Your best bet is to talk to a lender as they can educate you as to the best loan for your situation, some of these loans come with even lower interest rates than the average.


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