The Fed Is Cutting Rates — So Why Isn’t Your Mortgage Cheaper?

 

The Federal Reserve cut short-term interest rates this month by 0.25%, and with home affordability squarely in the economic crosshairs, many people expected mortgage rates to follow. After all, if the Fed is lowering rates, shouldn’t that make it cheaper to borrow for a home?

The reality is a bit more complicated, and understanding the “why” can help you make smarter choices if you’re buying or refinancing in today’s market.

Mortgage Rates vs. the Fed Funds Rate

Mortgage rates don’t move in lockstep with the Fed’s short-term policy rate. Instead, they’re much more closely tied to the 10-year U.S. Treasury yield, because most mortgages are either held or hedged by investors in longer-term bonds.

Those longer-term 10-year yields are influenced by:

• Inflation expectations – If inflation remains sticky, investors will require higher yields.
• Economic growth – Stronger growth can keep long-term rates higher.
• Treasury supply and demand – With large federal deficits, increased issuance of Treasury bonds can push yields up.

 

Historically speaking, 10-year treasury rates are still relatively low, but they have moved significantly higher in recent years.

 

 

 

 

 

Over that same timeframe, on average, 30-year mortgage rates are roughly +1.8% higher than the interest rate on 10-year treasuries. That spread compensates lenders for risk, costs, and profit.  Today, mortgage rates are more than +2.1% higher than the 10-year yield, suggesting that mortgage rates could continue to ease in the future. 

 

 

 

 

Because of these factors, we believe that there is a high likelihood that mortgage rates continue to decline as long term rates settle and the spreads between the rates converge.  As such, it’s important to consider how to position your mortgage purchase or refinance. 

 

Here are a couple of thoughts:

               

• Homebuyers:  Think twice before paying points to buy your rate down on your mortgage purchase. If rates move lower in the next 12–24 months, you might be better off refinancing at a lower rate later rather than locking yourself into upfront costs today.
• Refinancers: Be ready to refinance as rates come down, but as stated above, be wary of added costs to reduce your rate. While 30-year mortgages are overwhelmingly popular, shorter-term rate structures sometimes offer better deals.
• Loan Strategy: Explore alternatives like adjustable-rate mortgages that typically offer lower rates if you know you won’t be in the home long-term or plan to refinance before the fixed rate period ends

 

Interest rates are complicated.  While it may seem straightforward that the Fed’s cuts will directly impact the mortgage market, the impact is more nuanced over time as longer-term rates settle and spreads between mortgages and rates come down.  Homebuyers and homeowners can save thousands by having a thoughtful strategy around how they purchase and refinance their homes.

We help our clients by consulting on these types of transactions to make sure that they are set up for success and don’t waste their money.

 

If you have questions about how these concepts fit into your financial plan, please reach out.

 

 

Thanks For Reading! We Hope To See You Again!

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Advisory services offered through National Wealth Management Group, LLC, a Registered Investment Adviser. This information is intended for educational purposes and is not intended as a recommendation to buy or sell securities. Investing involves risk. Before investing, you should consult with a financial advisor to determine how a specific investment strategy fits your personal goals and objectives.