How the Fed Rate Cut Influences Mortgage Rates

Blog posted On November 05, 2019

Last week, the Federal Open Market Committee (FOMC) voted to lower the Federal benchmark interest rate.  As a result, average mortgage rates have trended lower.  When you’re shopping for a new home, you know you’re supposed to pay attention to FOMC decisions, but how exactly does the recent rate cut influence your future mortgage rate?  The Federal benchmark interest rate does influence the cost to borrow to money for a mortgage or other loan, but there are other factors that impact how mortgage interest rates are determined.

Secondary Markets

After your mortgage is issued, it will be sold to a “mortgage aggregator” or a third-party that repackages your mortgage with other debts to sell it to investors as a mortgage-backed security.  For example, Fannie Mae and Freddie Mac are mortgage aggregators.   Your interest rate will be impacted by the price the aggregators are willing to pay for the debt and the price they can sell the debt to investors.  

International and National Economic Trends

The Federal benchmark interest rate of the Federal funds rate is set by the FOMC based on foreign and domestic economic trends.  Even if the national economy is strong, international unrest related to trade policy or political issues can weaken the global economic outlook.  Lately, the trade war between the US and China, Brexit uncertainty in the United Kingdom, and economic weakening in the European Union have led to a global economic slowdown, causing the FOMC to cut rates.

Rate of Inflation

The Fed has a targeted rate of inflation of 2%.  When inflation exceeds 2%, the Fed will raise interest rates to curb inflation and make sure the economy does not overheat.  When inflation dips below the 2% targeted rate, the Fed will lower interest rates to stimulate borrowing and spending.

While your mortgage interest rate is influenced by the Federal Reserve, secondary markets, economic trends, and rate of inflation, your personal financial profile will also impact it.  Some of the factors lenders review include your credit score, income and employment history, outstanding debt, cash reserves and assets, the amount of your down payment, and the loan type, term, and amount.   Even if the Fed cuts rates, these other factors may cause you to have a higher interest rate. 

If you have a question about today’s interest rates, please let me know. 

Sources: Forbes