The Fed funds rate is the rate at which the Fed lends money to banks, and banks lend money to each other, NOT the rate that consumers borrow at.

When the Fed raises the Fed funds rate, it is generally to fight inflation.  Beginning in early 2022, inflation began to skyrocket, and throughout 2022 and so far into 2023, the Fed has consistently raised their rates to curb inflation.  While inflation has slowed, recent data points to inflation being higher than the Fed’s target rate, and for this reason, rate hikes have continued into Q2 2023.  Future rate hikes will depend on the direction of inflation from here.

It’s important to note that mortgage rates are not directly tied to the Fed’s actions.  Since high inflation results in high mortgage rates, the Fed rate hikes often help bring mortgage rates down, since reductions in inflation lead to reductions in mortgage rates.  Some other financial products are, however, tied directly to the Fed funds rate.  The “Prime rate” for example, moves in direct correlation with the Fed funds rate, so credit card rates will move up in line with the Fed funds rate.

Since early 2022, the Fed has raised their Fed funds rate by a total of 5%.  That means credit card debt has become 5% more expensive for consumers to carry, and other types of debts have become more expensive as well.  Mortgage rates, though, have come down substantially since their highs seen in October 2022, despite additional Fed rate hikes.

The Fed has signaled that they’ll rely on data and economic figures to determine the future direction of the Fed funds rate, but most forecasts predict the cycle of rate increases is either at or near it’s end, as inflation numbers and economic conditions seem to be shifting.

Mortgage rates improved on the day, and have come down substantially from October highs and another recent spike in February.

For questions about the Fed rate hike, mortgage rates, or anything else housing or mortgage related, you can ask an expert here and get answers instantly!

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A mortgage rate lock allows customers in need of mortgage financing to “lock” in their interest rate.  This is an important feature of mortgages because the markets that influence mortgage rates (Mortgage backed securities, or MBS) trade each day and in certain markets can be very volatile.  Rates can change daily, and sometimes even multiple times in a single day, so having the option for a mortgage rate lock can protect against some of that volatility.

How It Works

With most mortgages a mortgage rate lock happens during the process and a rate is locked to cover the period of time from when the loan process starts through closing and funding.  A borrower will select a lock period and their rate is set at the locked rate for the duration of the lock period.  The most common mortgage rate lock time frames are 30 or 45 days, but in extremely busy markets it can be more typical to see 60 day locks.  In improving markets when rates are going lower, sometimes a lender will wait until just before closing and do a 15 day (or less) rate lock.  Typically, the shorter the rate lock period, the better the rate/pricing will be.

In other situations where a customer wants to lock in a rate to avoid market volatility (ie a market where rates are expected to go up), a mortgage rate lock can be obtained for a longer period of time.  In some cases, this requires an up front fee, usually used more as a deposit that gets refunded at closing, as is the case with MasonMac’s “Lock & Shop” program .  This type of lock can protect home buyers during a new build, rebuild, or a situation where they’re looking for the right home and want to ensure their monthly payment ends up being what is expected.  These longer term mortgage rate lock programs offer that option.

What If the Markets Get Better (or Worse)

By the very nature of a mortgage rate lock, if markets get worse (rates rise), a borrower is protected by their mortgage rate lock.  The rate on their loan cannot increase if it’s locked, even if market rates rise.  But what if rates get better after a borrower locks in?  There are some protections in place.  Usually, if the market sees just slight improvements, a locked loan will retain it’s locked rate.  But if the market improves substantially, borrowers can be offered the opportunity to “float down” their rate to the current market levels.  Sometimes there is a cost for this, but a borrower who has already locked their rate can take advantage of an improving market.  This makes a mortgage rate lock a good idea because in a bad market (rates rising) a borrower is protected, and if the market gets really good really fast, a borrower can usually still take advantage.  Every lender has a different policy on “float downs” so it’s important to ask your loan officer to explain further.

How to lock your rate

Your MasonMac loan officer can review lock options with you to see which type of mortgage rate lock best fits your situation.  If you’re interested in new builds and think rates may go up (or the numbers for you to qualify are tight and rising rates could disqualify you from a loan completely), our lock & shop option may be best.  If you’ve identified a home and are under contract, a shorter term lock would offer you better pricing and protection to your rate through closing.  Our experienced team of loan officers can help you select the option that’s right for you, and talk to you about the best mortgage rate lock options available.  Once you decide to lock, it’s an easy process for your loan officer to make it official, and you’ll receive documentation that reiterates the terms of your mortgage rate lock.

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Today the Fed increased their Fed Funds rate by .75 percent.  While on the surface that doesn’t seem like too big a bump, this is the largest single-day increase to the Fed funds rate since 1994, signaling a serious attempt at Fed members to reign in inflation.  The move comes on the heels of last weeks surprisingly high inflation report which shook up the markets and led to losses in equities markets and steep and fast increases to mortgage rates.

There is often a lot of confusion around the Fed Rate Hike and how it actually affects the mortgage market, so we hope to clear up some of the common misconceptions.

1. No, mortgage rates do not go up when the Fed Rate Hike happens

Mortgage rates are influenced by many things, but one of the biggest factors in the percentage rate offered to mortgage applicants is inflation.  When inflation is high (as it has been for all of 2022 thus far), mortgage rates are higher.  When inflation is reduced, mortgage rates usually come down with it.  Since the Fed rate hike is intended to reduce inflation, the result is often reduced mortgage interest rates, though sometimes it takes time for rates to come down a noticeable amount.  Today, however, the mortgage bond markets gained huge ground upon the Fed rate hike announcement and commentary, so improvements in rates were felt almost immediately for mortgage applicants.

2. Other debts will get more expensive, immediately.

The “prime rate” is tied directly to the Fed funds rate, and many of the most common types of debt are tied to prime.  Credit cards and home equity lines of credit are two of the most common debt vehicles that do go up and down based on the Fed movements, so with the latest Fed rate hike, it can be expected that credit cards and home equity line of credit rates will see an identical .75 percent increase in their cost.  Since more fed rate hikes are expected throughout 2022 as the Fed continues to fight inflation, it can be expected that this revolving debt will continue to get more expensive on a monthly basis for anyone carrying this type of debt.

3.  Does a Fed rate hike mean recession?

Recession has been a hot headline recently, and for good reason.  Many economic indicators currently point toward the US being in or heading toward a recession, however Fed rate hikes don’t necessarily mean recession.  It’s important to note though, that rate hikes usually lead into recession.  The reason is that higher rates cool off a hot economy by making borrowing more expensive.  When borrowing is more expensive, there tends to be a ripple effect in the economy that often hits the job market (leading to increases in unemployment), and slows inflation, cooling the GDP and often leading into consecutive quarters of negative economic growth, which is the technical indicator of recession.  Since we don’t know we’re in recession until we have 2 consecutive quarters of negative GDP, it’s impossible to say if we’re in a recession or will be soon, but it’s likely the Fed rate hike (and subsequent rate hikes) could point toward recession sooner than later.

4.  Does the Fed rate hike impact other rates and payments?

Through the same ripple effect, the Fed’s actions indirectly affect many aspects of the economy, but what the Fed funds rate actually is, is nothing more than the rate banks borrow from each other and from the Fed.  When banks are borrowing for free or nearly free, as we’ve seen over the past several years, it allows them to offer lower rates and still profit.  When their borrowing costs go up, to maintain the same margins of profit, the rates they offer consumers also have to increase, which is why borrowing becomes more expensive almost across the board.  Mortgage rates are somewhat of an exception because of the impact Fed rate hikes have on inflation that we noted above.

5.  How low will mortgage rates go?

No one has a crystal ball when it comes to mortgage rates, but historically in times of a Fed rate hike, and moreso in times of recession, interest rates decline.  2022 has brought some of the steepest increases we’ve ever seen in terms of how quickly rates have risen, and it remains to be seen if a decline could be just as steep, especially considering the weird market conditions related to COVID-19 that brought us the historically low rates of 2020 and 2021.  If you’re considering applying for a loan, your best bet is to talk with a MasonMac loan officer to determine which options are presently available, and what type of loan product and rate best fits your financial needs!

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The Fed rate cut is a small piece of the big economic picture, but it does NOT have an immediate impact on mortgage rates as many people believe

Well, the Fed funds rate is the rate banks borrow from each other.  When the rate is cut, it is done to help stimulate the economy and increase inflation.  The Fed funds rate is NOT directly tied to mortgage rates or most other fixed rate loan instruments.  What IS directly tied to the Fed funds rate is the prime rate (the rate credit card variations are based on), so you may see rates on credit cards and other similar debt move in correlation with the Fed funds rate, but mortgage rates don’t move based on what the Fed does.

In fact, the market has already absorbed the forecast for a rate cut into current conditions – mortgage bond traders (and traders in every other market) forecast cuts or increases to rates well in advance of the actual decision/announcement day by the Fed.  The only time the Fed announcement has a large impact is when their decision differs from what the markets expected (for example, if the market expects a .25 CUT and the Fed announces a .25 INCREASE, you can bet there’d be some immediate market craziness).   So rates today won’t move as the Fed delivered exactly what the market was expecting.

But what about the bigger picture?  Long term, Fed rate cuts are indicative of an economy that needs a boost.  In a recessionary environment, inflation is generally low, and this is a positive for the bond market.  Because of this, when the Fed cuts rates, it’s usually a signal that mortgage rates are in a downward trend, but the rates don’t move down because of the Fed rate cut.  And the impact is certainly not immediate.

So if you’re locked into a mortgage loan today, your rate hasn’t changed for the product or loan program you’re applying for.  In today’s market, your timing is quite good – rates are near their historic low, and while there may be an opportunity to obtain a lower rate down the line (the changes to rates based on economic conditions generally move over weeks and months, not days), today’s rates are amazingly low when looking at the history of mortgage debt.

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The 2 biggest factors that go into mortgage rates are equity and credit scores.  For conventional loans especially, rates are largely driven by how much home equity your mortgage loan is tapping into.  Higher LTV loans (loans using a lot of home equity) tend to have higher rates than lower LTV loans.  Other aspects of equity come into play as well.  Have a 2nd mortgage?  Conventional mortgage loans have rate adjustments for that.  Using that home equity to take cash out of your home rather than just seeking out a reduced rate?  You guessed it – rate adjustments!

Many factors determine mortgage rates, but there are some things that can put you in the best position to get a great rate

On top of the amount of equity used, credit scores play a huge factor in many loan products, especially conventional loans.  A rate for a borrower with a 620 FICO score can be vastly different than a borrower with an 820 FICO, even with all other loan details being equal.  The highest rates for conventional products tend to be for borrowers seeking high LTV loans with low FICO scores.  The best rates tend to be offered to high FICO scores with large down payments or large amounts of equity.

On top of those 2 factors, there are various other things that determine rate – borrowers seeking alternative (nonQM) loans like bank statement products or investment property products that qualify on debt-service of a property will generally see higher rates.

Government loans (FHA, VA, USDA) are great programs that can offer competitive rates that are not as sensitive to LTV and rate.  While rates will vary depending on credit score, they don’t vary as much because many of the rate adjustments present on conventional loans do not exist in government lending.  So for someone with less than perfect credit, this type of loan product may still offer an extremely competitive rate.

Rates vary substantially from lender to lender and borrower to borrower, but in general – better credit, larger down payments, government loans (VA mortgage loans usually offer extremely competitive rates), and full doc (income derived from W2s and paystubs instead of alternative documentation) loans tend to offer the best rate.

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