Why the Fed’s Rate Cut Does Not Mean 0% Mortgage Rates

Blog posted On March 24, 2020

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Last Sunday March 15th, the Federal Reserve cut the Federal Funds rate to a range of zero to 0.25%.  The federal funds rate is the interest rate at which banks lend money to other banks.  It will influence other types of interest rates, like mortgage rates, but they are not the same rate and it’s unlikely that Americans will see 0% mortgage rates at any time. 

The emergency rate cut was in response to the global economic slowdown caused by coronavirus.  Federal Reserve Chair Jerome Powell explained that the recent rate cut was a preemptive move to support he flow of credit to households and businesses during the economic slowdown caused by coronavirus uncertainty.

Mortgage rates are influenced by several factors including the demand for Mortgage Backed Securities (MBS).  When banks and investors are buying fewer MBS’s, average mortgage rates will actually trend higher.

Your mortgage rate is also influenced by your unique financial profile and will vary from borrower to borrower. 

  • A good credit score and low debt-to-income ratio will all help you secure a lower mortgage interest rate because you are a lower risk borrower. If you have a lower credit score and high debt-to-income ratio, you may get a higher mortgage interest rate because you are a higher risk borrower. 
  • Your mortgage interest rate may be impacted by the size of your down payment, your loan terms, and the type of mortgage you have. A lower down payment on a conventional loan could mean a higher mortgage interest rate, while other loan programs like the FHA loan are designed to accept lower down payments. 
  • Additionally, a 15-year fixed-rate mortgage will typically have a lower interest rate than a 30-year fixed-rate because the borrower will repay the loan sooner.
  • An adjustable-rate mortgage usually has a lower introductory rate than a fixed-rate mortgage. However, an adjustable-rate mortgage will fluctuate over time, while the fixed-rate mortgage maintains the same rate of interest.

When the Federal Reserve adjusts the Federal Funds rate, average mortgage rates may follow the trend, but there are many other factors involved when it comes to your specific mortgage rate.  If you have any questions about mortgage rates for a new purchase or refinance, let me know. 


Sources: MarketWatch