Bankrate.com published the following article explain what you need to know about how the recent Federal Reserve interest rate increase affects your current & future mortgage.
The Federal Reserve doesn’t set mortgage rates outright, but its decisions play a role in how rates move. Despite inflation slowing markedly in June, the Fed announced another rate increase at the close of its July meeting, bringing its key rate up one-quarter percentage point.
“Mortgage rates are still near 7 percent and we’ll need to see a meaningful and sustained decrease in inflation before mortgage rates move materially lower,” says Greg McBride, chief financial analyst for Bankrate.
What the Federal Reserve does
The U.S. Federal Reserve sets borrowing costs for shorter-term loans by changing its federal funds rate. This rate dictates how much banks pay each other in interest to borrow funds from their reserves, kept at the Fed on an overnight basis.
Since 2022, the Fed has been increasing this key interest rate to help calm inflation — hikes that have made it more costly for Americans to borrow money or take out credit. Fixed-rate mortgages — the most popular type of home loan — don’t mirror the federal funds rate, however; they track the 10-year Treasury yield (more on that below). The fed funds rate does affect short-term loans, such as credit card rates and the rates on adjustable-rate mortgages. The Fed also buys and sells debt securities in the financial marketplace. This helps support the flow of credit, which tends to have an overarching impact on mortgage rates.
Factors that influence mortgage rates
Fixed-rate mortgages are tied to the 10-year Treasury yield. When that goes up or down, fixed-rate mortgages follow suit. The fixed mortgage rate isn’t exactly the same as the 10-year yield, however; there’s a gap between the two.
2 MIN READ Published July 26, 2023 Written by Ruben Caginalp Edited by Suzanne De Vita
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