Special Report: How the Fed Impacts Mortgage Rates

TWO WAYS THE FEDERAL RESERVE IMPACTS MORTGAGE RATES

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1. THE FED IMPACTS FIXED-RATE MORTGAGES BY BUYING AND SELLING MORTGAGE BONDS.

Interest rates on fixed-rate mortgages change whenever the Fed buys or sells mortgage bonds, and whenever the Fed makes statements about buying and selling mortgage bonds. During the pandemic, the Fed purchased an eye-popping $2.9 TRILLION of mortgage bonds, making it the biggest buyer of bonds in the market. This caused interest rates to go down to record levels at that time. Since then, the Fed has exited its pandemic-era bond-buying programs, which has caused mortgage rates to more than double. If the Fed makes any statements or decisions regarding its massive portfolio of mortgage bonds, this could impact mortgage pricing.

2. THE FED IMPACTS HOME EQUITY LINES OF CREDIT BY CHANGING THE "FED FUNDS RATE."

Interest rates on home equity lines of credit (HELOCs) change whenever the Fed lowers or increases the "Federal Funds Rate." That's because HELOCs are based on the Prime Rate and the Prime Rate is based on the Fed Funds rate. The Fed has increased rates dramatically in the past few years and indicated rates are likely to remain elevated for a while. This means that rates on home equity lines of credit have already spiked and are likely to remain elevated. That said, the Fed is expected to start lowering rates in September. This means that interest rates on home equity lives of credit may start to come down at that point, although it's unclear by how much.

NUMBER OF THE WEEK - $2.334 Trillion

That's the dollar amount of mortgage bonds still held by the Fed.

Source: Momentifi