Will Fed Rate Cut Lower Mortgages?

The Federal Reserve announced a rate cut at its policy meeting on Sept. 18. The federal funds rate was cut by 50 basis points, to a range of 4.75–5.0 percent. This was seen as a positive step for those hoping to buy a house.

However, the lower federal rate may not influence the current home mortgage rate that much. Several factors go into a mortgage rate, with only one being the federal rate.

The Federal Reserve is the central bank in the United States. It manages the supply of money and the cost of credit. Its stated goal is a prosperous economy via its dual mandate of price stability and maximum employment.

The Fed sets the federal funds rate. This is the interest rate that banks charge each other for short-term loans overnight.

Although the Fed fund rate doesn’t set mortgage rates, it does directly affect what consumers pay to borrow money. It has, therefore, some influence. There are other economic factors that affect mortgage rates.

The economy is a major factor in determining mortgage rates. Some of these include the jobs market and supply and demand. Personal factors can also influence a mortgage rate.

Mortgage rates and inflation usually correspond with each other. When inflation is high, rates are high. Inflation often leads to consumers buying less. This means that lenders must make up the loss by charging higher rates.

The job market also influences mortgage rates. When it is favorable and inflation holds to at least 2 percent, which is the Fed’s preferred target rate, the Fed doesn’t have an incentive to cut the fund rate.

The borrowers’ circumstances will also affect the mortgage rate. There is a bottom rate that can only be achieved, but reaching it has a lot to do with the individual, including:

• Credit score
• Borrowed amount
• Employment
• DebtThe economy fuels all aspects of the mortgage rate.

And while the Fed opted to cut rates, it may not have as much influence on the current mortgage rates as many would like to see.

The federal funds rate sets the tone for the economy, but the credit market often reacts before the Fed does. The federal funds rate influences mortgages, but doesn’t control them.

When rates rise, credit becomes more expensive. This compels demand to die down—which implies that the Fed reduces demand for mortgages. That’s because fewer consumers can afford to borrow.

This forces lenders to compete more for the few borrowers left in the market. As a result, mortgages and the federal fund rate don’t sync. Lenders will lower or raise their rate before or after a change in the federal fund rate.

Often the lenders take actions ahead of what the Fed is going to do.

Bonds are long-term investments. Corporations issue bonds, but the most well-known are Treasury bonds issued by the federal government.

Just like most mortgage loans, a bond has a fixed interest.

There’s a ripple effect between bond rates and mortgage rates. That’s because mortgage lenders set their rates slightly above bond yields to attract risk-averse real estate investors. With a mortgage, there’s a safeguard of property collateral.

The result is when bond rates increase due to dropping prices, mortgage rates usually grow to match the trend.

Yet conversely, strong bond markets with high prices and low yields lead to reduced mortgage rates.

Yet not every type of mortgage is influenced by bonds. The bond market does not, for example, influence home equity line of credit loans (HELOCs) or adjustable-rate mortgages.

The federal funds rate cut closely influences adjustable-rate mortgages and HELOCs. An adjustable mortgage rate changes about every six months. So, when there is a rate cut, the monthly payment decreases. But when rates increase, so does the monthly payment.

The same scenario happens with HELOCs. The Fed’s reduction of the federal funds rate directly affects a HELOC’s rate in a positive manner.

Credit card interest rates are slightly affected by a Fed rate cut.

For example, according to Lending Tree, when the Fed rate cut took place, the average bank-issued credit card interest rate was 24.92 percent. A half-point reduction saves roughly $1.50 per month in interest for a borrower with a $5,000 balance who pays $250 monthly.

Savers, who have enjoyed higher rates for certificate of deposit (CD) and savings accounts, were impacted by the Fed rate cut. In anticipation of the rate cut, more than half of traditional banks reportedly cut their CD rates, and one-third cut their savings account rates.

Most cuts were about 0.10 percentage points.

In the September meeting, the policy-making Federal Open Market Committee (FOMC) published a forecast as to what is coming next: two more rate cuts of 25 basis points.

The majority predicted there will be more cuts, but others predicted no further action. If inflation eases, the additional cuts may not happen.

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