So it is Federal Reserve Meeting time, and with it has come the inevitable questions about mortgage rates. My phone and in-box fill up with clients asking how the Fed’s decisions will impact their rate and prospective clients reaching out to see if that refinance now makes sense. As a business person, it is a great time because this event acts as a catalyst for interest in lending and potential business. As a mortgage professional, however, it represents a reminder of many disinformation about mortgage rates and myths as to when is the right time to lock a rate. So, in the interest of providing some incredibly basic background on the correlation between Fed action and mortgage rate or, more importantly, the lack thereof.
First and foremost, understand that when it comes to borrowing, all rates are not equal. The loan that you get for a car is different from the one that you get for your house which is different from the rate that you pay on a credit card. While most people basically understand this, they seem to have a mortgage blind spot, especially when the Federal Reserve meets. They hear rate and think that a rate is a rate equals a rate.
Some wait to lock their loan until they hear the results and end up disappointed when the results do not match expectations. Others hear the results and immediately hit the lender speed dial demanding a rate corresponding the Fed’s action. I once had to spend the better part of an hour with a client who was furious that her rate was not going to be adjusted by the 0.25% that the Fed had lowered rates by the day before. Her angst, as well as borrowers waiting to lock, is neither a bad nor a good decision, but it can often be an uninformed one and that is where the problems arise.
To make a decision of whether or not to lock, you must understand that The Federal Reserve does not set mortgage rates. However, the Fed does directly impact short-term borrowing, such as credit cards. In doing so, the Fed sets the federal funds rate, which is the rate that banks charge one another for overnight borrowing.
Mortgages are long-term loans and they tend to track with the 10-year Treasury rate, which is an entirely different thing. 10-year Treasuries are government issued-bonds with a ten year maturity. This means that you should not call your mortgage banker the day after a 0.25% cut in the Federal Funds Rate expecting to get a rate 0.25% better than it was the day prior. As you can see, it does not work that way. That said, the Fed can have an INDIRECT impact on mortgage rates.
When the Fed moves rates there is usually an impetus to do so. Economic concerns and inflationary pressure can, for example, drive the fed to raise or lower raters. It is not the move, but the underlying reason for the move that can drive mortgage rates. A particular decision could signal that the Fed is convinced that we have a weak economy, which can spook investors who, in turn, begin to worry about the economy. This can push them to shift their investments to “safe-haven” asset like the 10-year Treasury, pushing down yields, which then pushes down mortgage rates.
Another way that the the Federal Reserve impacts rates is through the buying or selling of debt securities in the marketplace. Shocks to the credit markets like the 2008 Crash or COVID-19 can have an adverse impact on the flow of credit and make borrowing expensive. When this is a detriment to the economy or when it causes a dissonance with the Fed’s targets, they can and do purchase Treasuries and mortgage backed securities to lower rates and keep credit available in the market the right price.
So, what does this mean to you when you are considering locking a rate around the time of likely Fed action? Well, in my opinion, it means very little from any other time that you are locking a rate. Whenever you are considering a mortgage decision, you should be looking at all of the relevant factors at that time. Every day, week and month is a new snapshot with different factors impacting the mortgage markets. The Federal Funds Rate is just one factor. You should also consider inflation as low inflation usually means lower rates. Additionally, you should look at other formal indicators, such as employment numbers, that would have an effect on the equities and bond markets. Finally, just look at what is going on in the geopolitical and global economic arena and if there are disruptive forces pushing the markets one way or the other. All this is, however, is a lot to digest even for market professionals. So my soundest advice is twofold. First, do not try to time the market as it is very difficult and, more often than not, it does not have the intended results. Secondly, if you do decide to integrate market factors into your choice, you should work with a lending professional who can help you understand the rate landscape at the time that you are considering so that you understand the benefits of locking your rate or waiting.