At December’s Federal Open Market Committee meeting, the Fed raised its benchmark Federal Funds Rate for the first time in nearly a decade. This is the rate at which banks lend money to each other overnight. It had been near zero to support economic recovery from the worst financial crisis since the Great Depression. The Fed felt that the economy had strengthened enough for a small increase to its benchmark rate.
What does this mean for home loan rates?
The Fed Funds Rate is not directly tied to long-term rates on consumer products, like purchase or refinance home loans. So home loan rates will not increase as a direct result of the Fed’s actions.
Instead, home loan rates are based on Mortgage Backed Securities, which are a type of Bond. If the economy continues to improve, home loan rates could move higher. Strong economic news usually causes money to flow out of Bonds and into higher risk investments like Stocks, which can cause Bond prices and home loan rates to worsen.
However, when times are tough, or when there is uncertainty here or overseas (like the recent market crash in China), investors tend to shelter their cash in less risky investments like Bonds. This typically causes both Bond prices and home loan rates to improve.
Time will tell if home loan rates are able to remain near historic lows this year. One thing is certain: This year will be filled with interesting economic activity that is important to you. And, I’ll be here to report the latest each and every month. Stay tuned!
If you or anyone you know has questions regarding refinancing or home loan products, please get in touch today.