Why Mortgage Rates Aren't 0%

Mar 17, 2020

Cut.  It’s a simple word that everyone is becoming increasingly familiar with.  In the past month alone, the Federal Reserve (the Fed) has cut the fed funds rate on multiple occasions.  First, they issued an emergency rate cut of 0.5%...something that had not been done since the 2008 financial crisis.  Then, over the weekend, it lowered the target fed funds rate again; but, this time it was lowered to nearly zero.

If you have been in the market for a new home or have been considering refinancing, you are probably thinking now is the time since mortgage interest rates are 0%, right?  Wrong.  Well…now IS the time; however, mortgage rates are not 0%, or anywhere close to 0%.  “Why not?” you may ask.  The short answer is because the fed funds rate is not directly correlated to long-term mortgage rates. 

There is a widespread misconception that the Fed determines mortgage rates, when in fact…it does not.  The Fed may exert an “influence” on consumer interest rates; however, mortgage rates are determined on Wall Street.  The fed funds rate is the interest rate banks charge to lend money to one another overnight, and it is the tool the nation's central bank uses to control U.S. economic growth (think of it as a provider of “economic guidance”). That makes it a benchmark for setting rates on consumer credit lines, such as:  credit cards, auto loans, mortgage loans, bank loans, and more.  In reality, mortgage rates may RISE or FALL, depending on how the market interprets a cut to the fed funds rate. 

Plain and simple, The Federal Reserve can impact daily mortgage rates, but it cannot set them.  Mortgage rates are impacted more by Mortgage Backed Securities and its likely there will be more investment into these securities.  So, what does all of this mean?  It means that if mortgage rates drop, you should be prepared to take advantage of them…quickly; but, even if rates do not drop any further, they are still HISTORICALLY LOW.  So, now IS the time!