What Does It Mean for Mortgage Rates When the Fed Cuts Interest Rates?
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.
