News of the Federal Reserve’s decision to cut its target interest rate to a near-zero rate has torn through the media. This bold and decisive action has been taken in a bid to support the economy in light of the developing coronavirus pandemic.
For many, the actions that have been taken, were done so quickly, and with a clear intent to try and negate some of the disruptions to the financial markets that took place during the global financial crises some ten years ago. For those with mortgages, you might be left wondering how this cut to the target interest rate will impact you, and this post is designed to explain the impact of a 0% to your mortgage.
One of the benefits of this second cut to interest in just two weeks is the stimulation it should bring to the economy by making it cheaper for people to loan money for a mortgage, along with other things.
A Historic Low for Mortgage Rates in the U.S.
While it’s highly unlikely that your mortgage rates are actually going to reach 0%, the rates are at an all-time low. Due to this fact, there is an increasing demand for people who want to try and reap some of the benefits of this move.
The rate of federal funds is not going to be in direct correlation with your mortgage rate. This is the rate the banks pay in order to borrow money overnight. If you consider that the government cannot borrow money at a zero percent rate. Then, take into account the fact that even the most credit-worthy individual carry some element of risk; it makes sense that there would be, at least, a few points additional to this figure in order to account for that risk.
Do you need to rush to get a mortgage or refinance right away?
As you would imagine, the mortgage companies will have been inundated with applications. If the forecasts are accurate, and many believe this to be the case right now, then mortgage rates should stay at this low rate for the majority of the year.
At present, the rates are being marked up somewhat. And, it is believed that after this initial backlog of applications have been worked through, that this would present the right opportunity, (in terms of timings); to be able to apply to either refinance and/or get a new mortgage application underway.
What effect will this have on the housing market in the U.S.?
There’s no doubt that the lower rates will entice many people to step out and shop. To use an acronym popular with millennials, it’s the “FOMO” theory hard at work. For those of you who aren’t yet familiar with this term, it stands for “fear of missing out.” Understandably, people do not want to miss out on this attractive low rate.
Although the impact of this cut in interest rates will not be immediately apparent. The swift introduction of this measure has been taken due to the uncertainty surrounding the future economy.
With social distancing set to become the new norm, and people proactively trying to avoid making contact with one another, it is thought that these measures and behaviors would negatively impact the housing market.
These lower rates are part of a coordinated effort to prevent the slowdown of consumer spending and help sustain a healthy, (or at least, an acceptable level) of economic growth. This is being done with the intended outcome of placing homeowners, households, businesses, and the financial sector as a whole in a better place, than if they were to not have had this support.
What This Means for You and Your Mortgage
If you are one of the many thousands of individuals who have already made an application to refinance, you will have been informed of a delay to the processing times, and this is simply that so many other people have jumped at the opportunity to do the same thing.
However, key mortgage rates actually rose last week.
Let’s take a look at last week’s numbers:
- The average 30-year fixed-rate loan was at a rate of 3.36%.
- The record low for the same is just a fraction away from this, at 3.29%. This record was set during the previous week.
- The average 5-year adjustable-rate loan was at a rate of 3.01%.
- The average 15-year fixed-rate loan was at a rate of 2.77%.
It is thought that the Federal Reserve’s cut in rates could reduce mortgage rates even lower. However, this is not guaranteed. While there are already many homeowners who are benefiting from and set to benefit from these historically low rates; there are no concrete assurances being offered as to whether or not mortgage rates are likely to move any lower.