When the federal reserve hikes interest rates, what happens to mortgage rates? | Business

Probably the biggest misnomer in mortgage finance is what consumers’ interest rates do when the Federal Reserve hikes interest rates. The Federal Reserve is trying to control and stimulate the economy or slow down the economy based on economic conditions. What they do or don’t do, does influence mortgage rates. But it is not a direct correlation. In other words, when you hear the Federal Reserve is hiking interest rates, you automatically think mortgage rates went up too, right? That’s not the case and here is why…

Mortgage rates thrive off bad or negative economic information. Not to be pessimistic, but it’s accurate. Mortgage rates get worse when there’s good news for the economy, as people then move their money out of the bond market, fixed income market, and enter the stock market. This is done so they could get a better rate of return on their money. When the economy is booming, the stock market rallies, and mortgage rate gets worse. When the economy is questionable, where uncertain people move their money out of the stock market and into the bond market driving the yields up and their rate to you the consumer down. Anything that’s perceived as bad economic information, generally will make mortgage rates more favorable i.e., lower to the consumer looking to purchase or refinance a home.

As we enter 2022 and inflation is something that’s on the federal reserve’s mind for a variety of reasons. They’re more than likely going to increase the Federal funds rate, probably at the beginning of summer 2022. This is of course estimated but the same dynamic will hold true whenever they hike interest rates. We must take a step back for a minute and remember that the Federal Reserve hikes interest rates to slow down or offset inflation in the economy. Inflation in the economy is the arch nemesis to both stocks and bonds. The Federal Reserve slows down inflation by hiking interest rates. What that does is two things. The Federal Reserve makes the cost to borrow money at a corporate level more expensive as the states borrow money on the Federal funds rate, which is the same rate the Federal Reserve uses to control and or stimulate the economy based on economic conditions. As a result, if corporate money costs more because we’re an inflationary environment that does not spell good news for a stable economy. Generally, in that type of a situation, investors will move their money out of the stock market and into the bond market where they can get a fixed guaranteed rate of return on their money, i.e., the mortgage-backed securities market fixed income market. When this happens, it drives mortgage rates lower. If we go back to the fact that the Federal Reserve is more than likely to increase interest rates in 2022, that probably is going to make mortgage rates go down. It might not make them go down immediately, but over the course of time it will drive and influence mortgage rates lower. When you hear that the Federal Reserve is increasing interest rates, don’t let that be a determinant for whether you buy a house or don’t buy a house. You should buy a house or take on a mortgage that you can afford with your income, debt-to-income ratio, and saving ability. All other factors out there in the market, budget is number one. It should be and always will be in the eyes of the mortgage lender who’s going to grant you a mortgage anyway. They want to make sure that you can afford the mortgage that you’re applying for.

If you’re looking for a loan officer or needs some mortgage guidance, pick someone who specifically understands the economy what’s transpiring with interest rates. Someone best to advise you as to when to lock in an interest rate, and or create the broader home buying strategy for you and your family.

Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.



Source

Leave a Reply

Your email address will not be published.