As mortgage rates fluctuate, there is a relationship between these rates and how the Federal Reserve sets rates. But how exactly are housing rates affected by the Federal Reserve?
The Federal Reserve can impact mortgage rates through the federal funds rate, which is the interest rate at which banks can borrow or lend their excess reserves to each other overnight. The Federal Open Market Committee (FOMC) is the policymaking body of the Federal Reserve that meets eight times a year to set the funds rate. When the FOMC raises or lowers this target rate, it indirectly affects different interest rates, including mortgage rates.
When the FOMC raises the federal funds rate, the cost of borrowing money for banks escalates. Consequently, banks might elevate their loan interest rates, such as mortgages. This makes it more expensive for homebuyers to borrow money and can slow down the housing market.
Banks can borrow money at a lower cost when the Federal Reserve lowers the federal funds rate. Consequently, banks might decrease their loan interest rates, such as mortgages. This can make it more affordable for homebuyers to borrow money and stimulate the housing market.
The Federal Reserve can affect mortgage rates but is not the only determining factor. Other economic factors, such as inflation, employment rates, and market conditions, also play a role in shaping mortgage rates.
If you have other lending questions, call the experts at NASB at 855-465-0753.