It’s no secret, unless you’ve been living under a rock, that the Federal Reserve almost for certain is going to raise interest rates in March of 2022. The question then becomes if the Fed raises rates, what happens with mortgage rates? Well, the answer just might surprise you.
Most people think when the Federal Reserve increases interest rates that automatically means mortgage rates go up too. That’s just not the case. They are correlated but it is not dollar for dollar the same. Here’s what you must understand with the Federal Reserve and what they do with interest rates. The Federal Reserve controls the money supply in the USA. They do this by raising and lowering the federal funds rate. The federal funds rate is what all other economic entities are tied to. Including the prime rate which is tied to most credit cards and home equity lines of credit. As a result, when the Fed increases the Fed funds rate, which they are doing to fight inflation, that’s going to make the cost of short-term money and consumer debt rise. What happens when this occurs, is that the cost of corporate funds become less attractive. In other words, stock market investors then start to feel the pinch the way consumers presently are. Those investors will not like the extra cost of funds as it’s going to erode their investment potential. The next best alternative for them is the fixed income market I.E., the bond market. When the Federal Reserve increases interest rates whether it’s in March of 2022 or after people will move their money from the stock market into the bond market. Driving the yields up and the rates to the consumers down.
To be clear the bond market more than likely will rally, and mortgage rates will start coming down again making the cost of funds more attractive for purchasing or refinancing a home. This phenomenon will probably take some time to occur as the Federal Reserve usually hikes interest rates in spring. This meaning it’s going to take a few months more than likely for the markets to reel in the effects of the federal reserve’s change to monetary policy. As such it’s going to take some time for mortgage rates to slowly start to trickle back down. What does this mean? It means the future of mortgage rates probably is not going to remain at the levels that it’s at today. Rates over the last few weeks in the first part of 2022 have been rising because of inflationary pressures across the US. This can be identified in food prices, gas prices, supply chain issues, real estate, the trucking industry, and the list goes on. People overspent in the last 24 months associated with the pandemic and now that spending has led to an inflationary environment. So as a byproduct of this it’s reasonable to expect interest rates down the line to get better. But for now, if you can get a mortgage rate on a fixed rate loan that you can afford to purchase or refinance a home generally, you’re going to do well knowing you can always refinance in the future.
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