Announcements will be made tomorrow, Wednesday, September 21st, about the Federal Reserve’s updated interest rate policies. There tends to be some confusion about the effect and how much control the Fed has on mortgage rates. Read below to clarify some of these misconceptions.
The four most common misconceptions about mortgage rates:
1. The Federal Reserve controls mortgage rates
There is constant talk that “The Fed is going to raise mortgage rates.” The fact is, the Federal Reserve does not have direct control over long term mortgage rates like they do with short term rates. They don’t host meetings and say, “Let’s raise the mortgage rates to 4%, or let’s lower them to 3.5%.” Although they did initiate some very creative strategies to keep rates low, such as quantitative easing. This is just a fancy way of saying the Fed was buying mortgage bonds to move and then keep mortgage rates lower. The Federal Reserve has since backed off their bond buying programs because investors are buying mortgage bonds again. There is no denying that they assisted in getting them down and keeping them down for a few years, but they did not adjust them directly from some internal lever like they do with short term rates.
2. Everyone qualifies for the same rate
Borrowers tend to think that everyone qualifies for the same mortgage rate. There are several factors that impact consumer mortgage rates, such as a borrower’s credit score, income, loan to value ratio, down payment amount, and the term/length of the mortgage. Rates are tied directly to daily trading of mortgage bonds, so lenders’ rates can change throughout each day. Often borrowers see an advertised rate and immediately think all consumers qualify for this rate. In reality, mortgage companies advertise their best case scenario to appeal to prospective clients, and then qualify these clients in order to provide them with their customized rate and loan program.
3. When the Federal funds rate increases, so do mortgage rates
This misconception comes from the five plus years of abnormally low rates’ making the situation feel normal. The Federal Reserve funds rate is not directly tied to mortgage rates. For example, in December 2015, the average mortgage rate was about 4%. Then the Fed raised the funds rate by .25%, and so many people were certain mortgage rates would go up, but instead they went down! In January, the average rate for a 30 year fixed rate fell four weeks in a row and averaged 3.79%. Since then, rates have continued to fall and were at three year lows a month ago. In June 2016, they fell more after the release of the poor jobs report. Most lenders were quoting 3.62% on a 30 year fixed rate. This clearly shows that they are not directly related.
4. Rates are going up
Since 2011, almost every economist and financial market industry guru has forecast that rates will be higher by the next year. The one standout year was 2014, when mortgage rates rose to approximately 4.5% and resulted in a weaker housing market. Every year there has been a reason why rates have remained low. From 2008 – 2011, the American economy had difficulty recovering and experienced low GDP growth. This was then followed by a significant government intervention that helped bring health back to the American economy. Of course it is not a misconception to think they will go up at some point but every year saying “they will definitely go up this year” has proven to be inaccurate.
This graph shows: interest rates on 30 year fixed-rate mortgages from 1971-2014.
These misconceptions are all the more reason why home buyers, and homeowners who are looking to refinance, should absolutely consult with a qualified mortgage lender prior to buying or refinancing. This will help them to truly understand their options, costs, and the rates before they proceed. A quarter percent or more on a rate could cost you thousands over the lifespan of a loan. When buying a home, it is best to consult a REALTOR® early on in the process to be your advocate, provide you with current market conditions, guide you through the process, and keep you up to date with in the ever-changing real estate arena.