What Does the Fed Rate Cut Mean for Mortgages?

Many current and prospective homeowners think they can score a mortgage without interest when they hear the Feds are going to cut interest rates to zero. Unfortunately that’s not the case. Here’s what cutting the rates to zero actually means and how it will affect mortgage holders.

What is the Fed rate anyway?

The federal government requires financial institutions to keep a certain amount of cash reserves on hand. In order to meet those mandates, banks, credit unions, and other members of the Federal Reserve System, lend money to each other overnight without having to offer up collateral.

At the individual level, each lender and borrower negotiate their own short-term interest rates. The U.S. Federal Funds Rate is conceived from the average of those rates combined.

When Covid-19 hit, the Feds slashed the rate to nearly zero and bought up around $700 billion in bonds and securities. By doing so, they hoped to stabilize the very recent roller coaster of a market ride.

How are mortgage rates affected?

The rise and fall of mortgage rates is closely tied to what’s happening on the open market with Mortgage-Backed Securities (MBS). Mortgage-Backed Securities are investments similar to bonds that are made up by bundling home loans sold by the banks that issued them.

When the Fed dropped the Fed Fund’s rate on March 3rd, investors sold off enough MBS that some mortgage rates actually went up. However, with the additional March 16th cut, the government also committed to purchasing mortgage-backed security bonds and treasury bonds. Their intention among other variables, was to drive mortgage rates down.

The technical term when the Fed buys up MBS is called Quantitative Easing. Quantitative Easing is used to stimulate the economy with a boost of cash. Over time this will drive the overall cost of consumer borrowing lower. In theory, this will create lower interest rates. This includes long-term, fixed-interest mortgage rates.

So, what’s the bottom line?

To have a better understanding where mortgage rates might go, pay attention to not only the MSB’s being purchased by the Fed, but also what individual investors are buying. The more these investors purchase, the lower the rates may go as well.

At CosmoLends we follow the news in real time. This ensures that clients are able to make the best decisions possible in a time of indecision.

Questions? Feel free to contact CosmoLends at 216.387.1003 today.