What the Fed Rate Cut Means for Mortgage Rates - Delmar Mortgage

What the Fed Rate Cut Means for Mortgage Rates

COVID-19 is, at its core, a public health issue. But the fallout beyond the spread of the disease is also reaching far and wide from education to the economy to Wall Street. And in what may have been one of the biggest financial announcements since the virus made its way to the United States, the Federal Reserve slashed the federal interest rate from already record lows to 0 to 0.25%.

Does that mean that current or prospective homeowners can score a mortgage that eliminates interest altogether? Unfortunately, that’s not the case. Here’s what the cut to zero interest really means, and how it will affect mortgage holders.

What is the Fed rate?

The federal government requires financial institutions to keep a certain amount of cash reserves on hand. In order to meet those mandates, banks, credit unions and other members of the Federal Reserve System lend money to each other overnight without having to offer up collateral.

At the individual level, each lender and borrower negotiate their own short-term interest rates, and the average of all those rates combined constitutes the U.S. Federal Funds Rate. By slashing the rate to nearly zero, along with buying up around $700 billion in bonds and securities, it hopes to stabilize the very recent roller coaster of a market ride.

How will mortgage rates be affected?

Many Americans see a Fed rate cut and think that automatically translates to a drop in mortgage interest rates as well, but that’s not the case. In fact, the rise and fall of mortgage rates is closely tied to what’s happening on the open market with mortgage-backed securities (MBS) — investments similar to bonds that are made up of a bundle of home loans sold by the banks that issued them.

When the Fed dropped the Fed Fund’s rate on March 3, for example, investors sold off enough Mortgage-Backed Securities that some mortgage rates actually went up. With the additional March 16 cut, however, the government has also committed to purchasing mortgage-backed security bonds and treasury bonds with the intention of, among other things, driving mortgage rates down.

So, what’s the bottom line?

The technical term for the Fed buying up MBS’s, mentioned above, is called Quantitative Easing, and its intention is to stimulate the economy with a boost of cash. If the Fed continues to purchase treasury bonds and MBS’s, it will drive the overall cost of consumer borrowing lower creating lower interest rates, including long-term, fixed-interest mortgage rates.

To understand where mortgage rates might go, pay attention to not only the volume of MSB’s purchased by the Fed, but by individual investors. The more they purchase, the lower the rates may go. At Delmar Mortgage, we haven’t stopped following the news in real time, ensuring that clients are able to make the best decisions possible in a time of indecision.

Questions? Feel free to reach out to us or your Delmar loan officer today.