Since the announcement that the Federal Reserve has cut interest rates to 0%, there have been many questions on what that will mean for mortgage rates in the coming days, weeks and months. Below is a Q&A to help answer your questions:
With the Fed cutting interest rates to 0%, does that mean mortgage rates will go to 0%?
The simple answer is no. Mortgage rates are not directly tied to movements in the Federal Funds rate. While you may see interest rates reduced on car loans, home equity loans and credit cards, it does not directly impact mortgage rates.
So what are mortgage rates tied to?
Mortgage rates are more closely tied to movements in the 10 year Treasury yield.
If that is the case, why have mortgage rates not dropped as much as the 10 year treasury?
There are two reasons for this:
- The first is pretty simple, with the initial drop in mortgage rates a few weeks ago, lenders have not been able to keep up with volume. One way to control volume is to raise margins, thus increasing (or not lowering) interest rates. As a purchase-focused lender, this does not apply as much to us. But many lenders that focus on refinances raised their margins significantly over the past week, thus keeping overall rates from falling further.
- The second reason is more complicated and is market driven. While mortgage rates generally track with 10 year Treasury yields, they are actually bundled in a different type of bond, a mortgage bond. Makes sense, right? While these bonds (mortgage and treasury) usually move mostly together, the COVID-19 driven market fear caused many buyers to buy the “safer” US 10 year Treasury bond instead of mortgage bonds. When there are a lot more buyers than sellers for treasury securities, this drives price up and rates lower – just like a house! So, while mortgage rates typically follow the 10 year treasury, both higher margins from lenders and fewer buyers in mortgage bonds versus 10 year Treasuries have forced rates to buck that trend.
There was also news on 3/15/20 about a new round of “Quantitative Easing” in the amount of $700B, of which $200B will be directed toward purchase mortgage bonds. What does this mean, and is this good news?
This may be good news and a much better indicator of what will happen in the mortgage market than the Federal Reserve cutting rates to 0%. In simple terms, the government has stepped up to the plate and said they will buy mortgage bonds at these lower rates to keep money flowing into the mortgage market and help the economy. This could certainly push mortgage rates lower over time, but also knowing this is a short term infusion and rates are already low, it may just help keep rates low but not necessarily lower them more. The bottom line is: we don’t know yet.
We know that it still may be a great time to buy a home, and all of today's uncertainty will eventually pass. The thing about housing is that delaying a decision to purchase due to unforeseen circumstances does not eliminate the need to purchase. It often only delays it a little bit. Please feel free to reach out to any of our mortgage consultants to have a more detailed conversation about your home financing options.
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