What a Zero % Interest Rate Really Means
Updated: Apr 14
I am not a loan officer, and I don't play one on TV. But I wanted to give you a little bit of insight to what all of these interest moves mean to you.
The Fed fund rate does not directly affect any
mortgage rate for the exception of home equity. And in contrast, the Fed meets only eight times a year to consider a Fed rate change, barring the emergency change we saw on Sunday. The mortgage rates can and do change in advance of any Fed rate consideration or change. I know some of you are sitting there thinking well what about the new QE package? What about this quantitative easing the government promised? Yes, as part of the QE package, the Fed announced that they will purchase $200 billion in mortgage-backed securities, which will help restore the correlation between 10-year Treasury yields and mortgage rates.
However, it will not immediately reduce the space between them, and let me explain what that means.
One of the biggest reasons of this mortgage vs. treasury disconnect came from this massive new supply of mortgage debt as a result of unprecedented refinance demand. And even if people thought that rates could or should be lower, we have seen three-year lows in interest rates in the last few weeks and as of last week, all-time lows. So for lenders to continue lending, they have to sell off this debt, but investors could not keep with this spike in demand. And like any marketplace where you have too many sellers and not enough buyers, prices begin to fall. And when prices of mortgages fall, interest rates for consumers go up. So we may actually see a tick up in mortgage rates in the short term. Where rates go from here will depend on where the bond market goes. To be sure, yields will likely remain low and potentially go lower. And if that increasingly looks to be the case, mortgage rates will gradually do the same.
But, and this is an important but, rates are not going down to half a point or to 0%. So what does all this mean for you, the consumer? Rates are historically low. You only get five chances your entire life to buy low and rates are at lifetime lows. I encourage you to be active in the market because that deal might be around the corner. And for those of you that have had trouble getting into the house you actually want, these lower rates offer you more purchasing power, and in an uncertain time, sellers may be willing to take a little bit more off the price.