The Federal Reserve made an emergency cut to interest rates on Sunday, lowering the Federal Funds rate to a range of 0% – 0.25%.
This is the result of the Fed attempting to stay ahead of additional economic disruptions caused by the COVID-19 situation.
The Federal Funds rate is the rate banks charge when lending to one another. It also has a more direct impact on rates for credit cards and other consumer loans.
While it’s an important benchmark to watch, the Federal Funds rate often gets confused with mortgage rates, which is not accurate.
What does this mean when it comes to mortgage rates?
The rate cut by the Fed has led some consumers to believe this means mortgage rates have dropped to 0%. That is not the case.
In fact, last week U.S. mortgage rates actually went up despite recent cuts to the Fed funds rate.
When it comes down to it, mortgage rates are driven by demand for Mortgage Backed Securities (MBS).
Mortgage rates are higher than anticipated because of a logjam in the MBS market, where most US home loans are sold. The rush to refinance has flooded the market with MBS.
In fact, investors that act as intermediaries in the market have struggled to sell MBS due to the extreme over-supply.
Essentially, the cut to the Federal Funds rate and the Fed’s new commitment to buy at least an additional $200 billion in MBS are efforts to increase demand. However, at this point MBS supply is still greater than demand, preventing the Fed rate cuts from directly improving mortgage interest rates.
The truth of the matter is that most lenders can essentially get the same rates. What sets Service First apart from the rest is not only its vast lineup of loan products and highly trained professionals, but also its non-linear process that allows loans to close in a timely manner.
If you have any questions, please contact your Service First Loan Officer.
Executive Director of Strategy
About the Author
Ian Kimball is the Executive Director of Strategy at Service First Mortgage. He has direct responsibility for Sales Development, Marketing, Specialty Lending, IT, Accounting & Finance, Project Management and Strategic Planning and is focused on building the company’s infrastructure, tools, processes, and systems. Ian has been in the housing industry since 1997 and holds a Bachelor’s degree from the University of Minnesota. He enjoys outdoor activities, sports, reading, and spending time with his wife and two daughters.