Contrary to popular belief, interest rates are not that important for home buyers. Not like mortgage rates, at least. They do not interlink, and if your FED rates are rising, it is not guaranteed that the mortgage rates will also rise.
Let us expand on what exactly I mean, so you have a better understanding of both mortgage and interest rates.
The first thing we should clarify is what FED rates are exactly. FED stands for Feds Fund Rate, it is the interest rate that banks are given on money held at the Federal Reserves. When these rates rise, the economy tends to slow down, as they lead to fewer loans. And when there are fewer loans, there is less spending, which leads to a dip in the economy.
So the question that always arises from this concept is: if interest rates are rising, does that not mean mortgage rates will also?
This is not true. Fed Funds have nothing to do with mortgage rates. When we take a mortgage, we are borrowing money from now until about thirty years into the future, depending on the agreement we make. And this money comes from the bank. They will have to lend you money for those thirty years, and hence need to dwell carefully on the interest rates, as they will stand for the present and future.
Ten year treasury’s are responsible for taking expectations for what interest rates will be in the next ten years, and finding out their worth today. Mortgage rates copy these predictions, so the increase is already included in the mortgage, and this is why mortgage rates are not effected by Feds Fund Rate.
The next question that comes to mind, is, then what does lead to an increase in mortgage rates?
That is simple, it is just expectations.
Feds tend to increase their rates when the Ten Year Treasury decrease theirs. So, if you are trying to work out one or the other, you can do so in this way. Another thing you should be aware of is when interest rates of the Ten Year Treasury go down, so do mortgage rates.
The last question that may come to your head when you think about this concept that we will be answering for you today is: In what way does interest affect the home buying process?
There are two parts in a buying process where interest rates tend to make their appearance, one is when you are actually considering buying, and one is when you want to figure out the current interest rates before you make the buy.
Locking in an interest rate is helpful because it means you can avoid any risks of the rate being too high, and as long as you figure it out at the right time, you can work out what your mortgage rate will be too. Fed and mortgage rates are two concepts that take years to understand fully, but hopefully, after reading this article, you have a good enough idea when you are making your purchase!
