Find out how Fed rate increases really affect mortgage rates.
It is indeed true that the Federal Reserve recently raised rates, but that won’t necessarily translate to higher mortgage rates.
First of all, the rate at which the Fed adjusts (aptly named the Fed Funds Rate), governs only the shortest time frames, such as overnight loans among big banks. Although its effects radiate to longer-term debt like mortgages, the two are far from joined at the hip. Short-term rates often move one direction while long-term rates move another.
Secondly and most importantly, every person responsible for trading the bonds that govern mortgage interest rates was well aware that the Fed would be hiking rates. And I do mean every last person without a single exception. No Fed rate hike has been better telegraphed during this cycle.
When bond traders know what’s going to happen in the future, they will trade accordingly as soon as they can. That means mortgage rates had long since adjusted to the recent rate hike, so much so that the hike itself was a non-event.
Mortgage rates are much more directly impacted by economic data, projections and events. Remember, bonds are considered a safer, less-risky investment than stocks. When there is economic turbulence of any kind, traders will most often sell stocks and buy bonds, moving from risky to safe until the storm has passed. This technique helps mortgage rates.
Conversely, when strong or stronger-than-expected economic data is released, traders will buy stocks and sell bonds, moving from safe to higher risk-reward scenario. This adversely affects mortgage rates. So, what it comes down to is a Fed rate increase doesn’t always mean that mortgage rates are on the rise.
With all of that said, it is important to also mention that Fed rate increases do directly affect HELOCs (Home Equity Lines of Credit) because they are tied to the prime rate. When the Fed rate moves, the prime rate moves.
This is important because considering the upward trend of Fed rate increases, along with the inability to write off interest paid towards a HELOC, now may be a good time to consider consolidating an existing first mortgage and HELOC into one new fixed rate loan. Fixed mortgage rates are still at historical lows, so if you consolidate the two loans now, you will not only generate a higher tax deduction but also eliminate the fear of a constantly rising interest rate on the HELOC.
As always, if you have questions, we are here to help.
Richie Sloan offers personalized, concierge-level service as a senior mortgage banker at IberiaBank Mortgage. He has served Central Floridians as an expert residential mortgage lending resource and trusted advisor since 2000.