Interest rates and inflation are hot-button issues right now - but how does it affect your search for a mortgage?
It’s been all over the news: to curb inflation, the Federal Reserve (aka, the Fed) has hiked interest rates, again! Politicians seize on this as a hot-button issue to trash both sides of the aisle, but what does it ACTUALLY mean? And does it mean anything for your mortgage?
Well… it’s complicated. And certainly not direct. An increased interest rate does cause mortgage rates to also go up, but not as directly as one might think. But the Federal Reserve has another tool to affect mortgages, which is buying bonds (but we’ll talk about that later).
When the Fed increases interest rates, they make it more expensive for banks to borrow from each other. Banks then pass that extra spending on to the borrowers; any borrowers that can’t afford that extra spending, well… they don't get to borrow money.
That means there’s less money floating around in the market, which, ideally, combats economic inflation (which we’re seeing a lot of right now). But those interest rates take time to make an impact; they might have to stay in place for several months or longer before the larger economy shows marked changes.
However, those interest rates do have more immediate effects, especially for potential homebuyers. For people searching for new homes, that means that some buyers in 2022 might be denied mortgages they might have gotten if they’d applied in 2021. And if they do get the mortgage, the monthly payment will be higher (especially since the cost of housing has increased).
For current homeowners, interest rates are less significant because you’ve already gotten your money (unless you have an adjustable-rate mortgage - then you might want to look out!). However, according to CNET, interest rates can still affect your home equity, and if you’re looking to sell your house, you will probably have fewer potential buyers.
So, recap: by increasing the interest rate, the Fed attempts to limit the amount of money on the market. By limiting the amount of money in the market, the Federal Reserve forces banks to spend more, who then force borrowers to spend more. People who want mortgages will, therefore, have to pay more to secure them.
The Federal Reserve’s most direct effect on mortgages is through MBS, or mortgage-backed securities (a kind of bond). That affects both homebuyers and homeowners.
Basically, the Federal Reserve buys a whole crap-ton of MBS every month. This keeps demand for mortgages high and keeps lenders lending. If lenders keep lending, people keep buying houses, which stimulates economic activity, which is… ultimately good.
Additionally, when the Fed buys these mortgage-backed securities, mortgage rates go down because banks and other mortgage sellers know they will have a buyer. When the Fed sells securities, mortgage rates go up to attract more buyers willing to take on the securities (which will make them money).
That means that mortgage rates are more dependent on the state of the bond market and, therefore, on the actual people looking to buy property, where they’re buying property, for how much, etc. And that can be MUCH more volatile. As Rocket Mortgage states, “If there’s enough demand for stock in a tea company in China, the price of tea in China could affect mortgage rates” in a certain area.
While this may sound like a lot to take in, we here at Northwest Mortgage are here to help! If you have questions, or if you want to know about locking in your rates, we are here for that too.
Mark Klein- 132598
NW Mortgage- 128113