The Federal Reserve ended its zero-interest rate policy in December 14, 2016, raising rates by 25 basis points (0.25%) for the first time in more than a decade.
However, the Fed move did not lead to an increase in consumer mortgage rates.
U.S. mortgage rates aren’t set or established by the Federal Reserve or any of its members. Rather, mortgage rates are determined by the price of mortgage-backed securities (MBS), a security sold via Wall Street.
The Federal Reserve can affect today’s mortgage rates, but it cannot set them. The Fed does more than just set the Fed Funds Rate. It also gives economic guidance to markets.
For rate shoppers, one of the key messages for which to listen is the one the Fed spreads on inflation. Inflation is the enemy of mortgage bonds and, in general, when inflation pressures are growing, mortgage rates are rising.
Mortgage rates are based on the price of mortgage-backed securities (MBS) and mortgage-backed securities are U.S. dollar-denominated. This means that a devaluation in the U.S. dollar will result in the devaluation of U.S. mortgage-backed securities as well.
When inflation is present in the economy, then, the value of a mortgage bond drops, which leads to higher mortgage rates.
This is why the Fed’s comments on inflation are closely watched by Wall Street. The more inflationary pressures the Fed fingers in the economy, the more likely it is that mortgage rates will rise.
Thirty-year fixed mortgage rates rose more than half a percentage point in the four weeks after the election of Donald Trump. Rates are solidly over 4% for the first time this year. On a 30-year fixed-rate mortgage for $300,000, each half-point increase adds close to $100 a month to your payment.
So that’s already happened.
With additional Fed rate hikes expected next year, mortgage rates may have as much as another half a percentage point to go. That would put home loan interest rates just under 5% by the end of 2017.
If you’re all set to buy, don’t let moderately higher mortgage rates worry you. Proceed according to your plan. Although the long-term outlook seems to indicate steadily rising interest rates, we’re building on very low ground. You know that whole “historically low mortgage rates” thing you’ve heard for the last few years? Yeah, we’re still there.
It will take a long climb higher before mortgage rates are back to their 44-year historical average of 8%. In the meantime, you’ll be in the money with a 4% or 5% home loan. Even a 6% mortgage is a significant discount to the average.
Yes, your buying power can be affected by higher interest rates, but that can also be offset by the better wages and greater employment opportunities of an improving economy.
Take a look at today’s real mortgage rates now in your area. Your social security number is not required to get started!