Why doesn’t the Fed Rate directly correlate to mortgage rates?

As anticipated, the Fed initiated a 0.5% rate hike earlier this month, showing it is taking inflation seriously.  By increasing the benchmark interest rate for the economy, the Fed has influenced mortgage rates higher as well.

One of the main goals of this decision is to put a damper on housing prices that have skyrocketed more than 30% over the past two years.

Higher mortgage rates = higher borrowing costs and reduced purchase power for buyers.

Though it’s important to note that the Fed rate is not a direct correlation of mortgage rates, they do tend to impact one another.  The Fed Rate is not as long term, compared to a 30 year mortgage rate. If rates are higher in the short term, it can be healthier for the market in the long term (i.e. – over a 30 year mortgage). Banks factor this in when setting rates.

A 0.5% increase in the Fed rate does not mean a 0.5% increase in mortgage rates, whereas auto loans or HELOCs would be more directly affected.

Where are interest rates headed and what does it mean for consumers?

The future can be tricky to predict when it comes to rates.

The last time we saw inflation at the same level it is today was 1980. In 1981 the average national interest rates on a 30 year mortgage peaked at 18.63%.

And mortgage rates are now rising at the fastest pace since the spring of 1994, touching 5% in April after beginning the year at just over 3%. (That equates to $440 more in payments each month for a person buying a typical existing home in the US!!)

Though I can’t predict where rates will fall, it’s safe to assume they’ll continue rising for the foreseeable future. BUT, despite those big scary numbers, there is some hope. Fundamentally, the trend shows we will revert back to mean (center) which is 7-8% according to FRED data.  We’ve been at an extreme low and are climbing, but at some point rates will come back down.

The situation is rapidly changing, but we’re monitoring all the data weekly.

In the meantime, some key takeaways:

• If you’ve been thinking about a purchase anytime in the next 6-12 months, you would benefit from locking in rates before they go higher
• If you’ve been prequalified, check with your lender; is your loan amount still accurate?
• If you’ve been thinking about selling, low inventory is still driving up home value, though not quite at the double-digit level of last year