How Fed Rates Affect Mortgage Rates

By Heather Petty 

Inflation is everywhere in the news, including near-constant stories about whether the US Federal Reserve will raise interest rates to fight that inflation. And with the Fed expected to hold off on any rate increase or decrease in the coming September meeting, many are wondering how that might affect the housing market in the coming months.

Fed policy doesn’t dictate fixed-rate mortgage interest

The federal funding rate, which is the rate the Fed determines, doesn’t directly affect mortgage rates. It dictates how much it costs banks to borrow from their reserves, which are stored at a regional Federal Reserve banking facility.

That rate also affects all short-term loans, credit card rates and adjustable-rate loans, such as adjustable-rate mortgages.

Many factors affect mortgage rates

Mortgage rates are more closely aligned with the 10-year Treasury Yield, which is the money investors can make on 10-year treasury securities. But average mortgage rates aren’t tied directly to that yield rate either. Inflation and market demand also affect fixed rates on mortgages, as does the secondary mortgage market, where mortgage-backed securities are bought and sold.

Currently, with few buyers and sellers in the market and inflation starting to decrease, average mortgage rates have fallen from their high in October 2022, when 30-year fixed rates averaged 7.18%, according to Freddie Mac, to 6.9% as of August 3, 2023.

But that doesn’t mean you’ll be offered a 6.9% rate. Regardless of the national averages or the interest rates advertised by your favorite lender, if you want to get the lowest rate possible, you need to work on raising your credit score, lowering your debt and saving up to make the biggest down payment you can.

Waiting to buy may not be the right answer

So, should you rely on mortgage rates to tell you when to buy? Most experts predict that mortgage rates will fall a bit, averaging 6.1% to 6.4% by the end of 2023, so waiting a few months to buy the house you’ve always wanted may be worth it. But waiting for interest rates to freefall can keep you from investing in a home for years and years. And in those years, the value (and prices) of the homes in your area will most likely continue to rise. 

This may not be the best time to refinance your home, especially if you’ve locked in a much lower rate. But if you need to buy a home, refinancing is always an option. You won’t be stuck with this mortgage rate forever. Buying now can allow you to build equity as your home rises in value, and you can refinance when mortgage rates trend down again.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics

Personal Finance Economy