FAQ: How the Federal Reserve Affects Mortgage Interest Rates

Home Buying

Over the last few months, you may have seen news that the Federal Reserve has dropped its benchmark interest rate and that mortgage rates are at historic lows. How does the Federal Reserve impact mortgage rates? What other factors influence mortgage rates and how do you know the best time to pursue home financing? Check out some of our helpful FAQs.

Q: If the federal funds rate is at zero, shouldn’t the interest rate on my mortgage be close to zero?

 A: The federal funds rate is the interest rate at which banks borrow and lend money from one another. Banks can lend excess money from their reserves on an overnight basis. This has a large impact on the overall economy including employment, inflation, and growth. Though it can influence interest rates for mortgages, auto loans, and credit cards, there’s not a direct correlation.

Q: If the U.S. Treasury Bond is at a low yield, will my mortgage interest rate be lower?

A: While the U.S. Treasury Bond and fixed mortgage interest rates are linked, the treasury bond is not the only thing that influences a mortgage interest rate. An additional factor is Mortgage Backed Securities (MBS). A MBS is a bundle of mortgage loans sold to investors and prices are determined by supply and demand.

Q: Do other factors impact mortgage interest rates?

A: Yes! Other factors influence mortgage interest rates including investor demand for MBS, the yield on the 10-year Treasury notes, and economic and political factors. Additionally, your individual interest rate is based on your credit profile, loan type, and other aspects. You may be offered an interest rate different than what is advertised based on your individual situation.  

Q: When is a good time to pursue home financing?

A: While no one can predict the future or when mortgage interest rates will adjust, working with a trusted mortgage professional can help you make an informed decision on when to pursue home financing.

Interested in learning more about home financing options? Contact an Evergreen loan officer near you.

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