The Federal Reserve System, also known as the Federal Reserve or simply, the Fed, is the central banking system of the United States. They regulate banking operations within the US to maintain stability of the system. The Fed frequently meets to regulate things like interest rates, policy, and more. They usually cut interest rates to promote economic growth: people tend to be more likely to borrow at a low interest rate, and when they get these loans they are reinvested into the economy. But what happens to mortgage rates when the Fed cuts interest rates? Read on to find out more.
When people refer to the Federal Reserve “cutting rates”, they are technically referring to just one rate. The Fed sets the target interest rate, which is a guideline for the interest rates that all the banks in the US charge on their loans. The reason people refer to it as “cutting rates”, is because when the Fed cuts this target rate, all banks follow suit and cut their rates to be within range of the target. Even many international rates will also adjust according to this target rate.
Why Do They Change the Target Rate?
It may seem like the Federal Reserve should just set the rate, and keep it there, but actually, it’s important to adjust it based on where the country is in its growth rate. Some borrowing and investing is good to ensure the economy thrives. However, if people get too much money and there is too much growth, it can cause inflation – this devalues the purchasing power of currency. When this starts to happen, the Fed raises the target rate, and the growth rate will equalize. Then, when they need to stimulate the economy, they can lower it again.
What Does It Mean For Me As a Homeowner or Home Buyer?
So what does it mean for your mortgage when the target rate is cut? That depends on what type of mortgage you have, and when you’re purchasing:
Fixed Rate
If you have a fixed rate mortgage, your rate will not change based on what rate the Fed sets or when banks adjust to accommodate for that change. If you are purchasing a new home and starting a new mortgage, getting into a fixed rate at a time of low rates can be ideal. This is also a good time to refinance your home to get a better rate.
Adjustable rate
If your mortgage rate is adjustable (also known as an ARM), your mortgage rate will usually decrease. This is a great time to purchase a new home as well as you can get into your home with less interest paid.
So, if you are a homeowner, refinancing, or looking to get into a new home or maybe your first home, a lowered target rate can mean lower rates for you! Talk to your banker about what will be best for you, and enjoy the home of your dreams.
Foreclosure can be stressful to say the least. Once you’re ready to put that behind you and purchase a new home, you’ll no doubt be imagining the new kitchen and spacious backyard you might be able to purchase. The last thing you want to think about is your credit score. But after a foreclosure, FICO (the data analysis company responsible for giving credit scores) says your credit score could take a hit of as much as 160 points. That’s a long way to have to make up in a short time period if you’re looking to purchase again in the near future.
As a VA buyer, you are slightly more fortunate than a traditional buyer if you’re in this situation. VA loans have more flexible credit requirements for buyers than conventional financing, so this can help you get back on your feet and into a home sooner.
When you’re looking into a VA loan after foreclosure, you will see the term “seasoning period” used a lot. It’s important to understand what that is so you know what you’ll need to do for your loan. Seasoning period: The length of time you need to wait to get a new loan
Now that you know this terminology, read on:
Before You Foreclose:
Foreclosure means that a bank has lent money for a property that hasn’t been repaid, so basically, it is taking the property back to repay its loan. If you haven’t foreclosed yet, there are two options which may reduce your seasoning period. In this situation you can usually do one of two things other than actually foreclose:
1. Deed-in-Lieu
2. Short Sale
These are both looking into if you haven’t yet foreclosed, because while they are both considered negative credit events, they can look better on your credit report than a foreclosure.
After Foreclosure:
So let’s say you already have completed your foreclosure. In this case it is most likely going to be a minimum of a two year wait before you can qualify for another VA loan. In some cases of financial hardship, this seasoning period may be reduced.
This may seem like a long time to wait, but buyers who have gone through foreclosure and are applying for conventional financing need to wait a period of seven years!
Don’t Disregard Your VA Loan Entitlement
Your VA loan entitlement will be affected by foreclosure. It will likely be reduced, but after two years most applicants are able to use it in some form again. Each case is different, and the country in which you’re buying will also change the amount of the entitlement, so it’s good to have a loan specialist help you go over the options. This will ensure that you get the most out of your loan entitlement and into a home that’s right for you as soon as possible.
Having foreclosed on a property in the past can be discouraging, but when you’re ready, there are still plenty of options when it comes to obtaining a VA loan and the dream of owning your own home.
