Mortgage Rate Myths #2 – The Federal Reserve Sets Mortgage Rates

(The most common myths about mortgage rates, and a few tips to avoid common pitfalls.)

The Fed is expected to raise rates by 0.25% later today. ?Does that mean mortgages rates will be 0.25% higher this afternoon, or tomorrow, or next month?

Myth: The Fed controls mortgage rates and sets them at specific levels.

Fact: The Fed sets the rates banks borrow at, not long-term mortgage rates for homeowners.?Banks and lenders set mortgage rates based on the outlook of where rates will be over the next few years.

This means the Fed influences mortgage rates, but doesn’t set them directly.?Also, since the Fed usually sets clear expectations in advance about changes they plan to make, lenders have (in most cases) already made the adjustment to mortgage rates by the time the Fed actually changes rates.

?What banks and markets are mainly watching for today are updates to “the Fed’s outlook,” or the dot plot, of what the Fed plans to do with short term rates for banks over the next year or two.?So, it’s possible that the Fed could officially raise rates today, but if they update the outlook to indicate lower rates in the near future, mortgage rates could go down.

If we think about a lender’s profit on a long-term mortgage, these dynamics make sense.?Lenders don’t care as much about how much they profit on a loan over the next few months; they are concerned more with the overall profit over the next few years on the loan.?If lenders expect rates to keep rising from the Fed, they will raise the mortgage rates they offer. If lenders expect the Fed to lower rates soon, they would be willing to offer lower mortgage rates. It’s the outlook from the Fed that matters most in mortgage.

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The best way to benefit from the ups and downs with the rate outlook is to work with a loan officer who follows markets carefully.?We can help you make a wise decision about the timing of your rate lock.?Ideally, we would try to avoid locking when many others are worried about the outlook getting worse.?We can watch for a time to lock when the outlook appears better, but lock ahead of important economic reports that could worsen the outlook.

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Coming soon: watch for my next article about how often mortgage rates can change.?Feel free to comment with any guesses on how often rates update.?It’s more often that most people think.