Can Changes in the Federal Funds Rate Affect Mortgage Rates?
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Some experts tell people buying homes not to worry about the federal funds rate, saying it doesn’t directly affect mortgage rates. However, there are connections to think about. Knowing what the federal funds rate is important—it shows the interest rate banks use when they borrow money from each other.
Even though the Federal Reserve decides this rate, there’s a lot of disagreement about when it should be increased or decreased.
So, does the federal funds rate affect mortgage rates? Opinions diverge. While many say that it does not, reviewing historical facts may lead one to reconsider such assertion. Even though the federal funds rate doesn’t always lead to changes in mortgage rates, they usually move in the same direction over time. Some people believe that this connection is due to larger economic trends, not a clear cause-and-effect relationship. However, it’s clear that there is a connection between the federal funds rate and mortgage rates, even if it’s complex.
Given this, it’s unsurprising that most homebuyers look for good mortgage bargains when the federal funds rate is low. The argument is straightforward: if the Fed lowers the federal funds rate, banks can lend money at lower rates, perhaps leading to cheaper mortgage alternatives for purchasers.
Housing costs are expected to rise in the future. When the economy is in recession, the central bank tends to lower interest rates, as it did in the last recession, which has kept mortgage rates relatively low but as the economy gets stronger, this number may rise gradually. We can already see this, as most rents today are higher than they were a year ago.
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