Federal Reserve policymakers, in their most recent meeting, revealed that they would concentrate on an aggressive acquisition of mortgage-backed and government bonds while trying to maintain a 0% yield on interest rates throughout the year 2022.
Dick Lepre, a senior loan officer at RMP Mortgage Inc. from San Francisco, evaluated the action plan and hinted that the launch of an extensive bond-buying program by the Feds would result in low mortgage rates and low treasury yields. The last time Fed had to depend on such measures to stimulate a sluggish economy was back in the 2007 financial crisis. For a period of six-years, mortgage rates witnessed at a record low level. This expansionary fiscal policy is one of the many ways in which the Fed is trying to affect mortgage rates.
However, even then, the Fed cannot set desired mortgage rates directly. The latest announcement regarding keeping interested in federal funds at 0% can only be used as a tool for influencing the rates you receive, but cannot categorically determine it.
UNSPLASH | FED IS HAVING A HARD TIME SETTING A DETERMINED MORTGAGE RATE
“What the Fed sets is the overnight rate,” explains Lepre. The rate that banks and all other financial institutions use among themselves when managing their monetary transactions involving lending and borrowing is called the federal fund rate.
Mortgage rates tend to follow with the rate on the 10-year Treasury bills. So, while the Fed cannot fix the yields on the Treasury, reducing the federal funds rate can sometimes provide incentives for investors to invest in the ten years treasury bills consequently, pushing down returns on both Treasuries and mortgage rates. Supply and demand rate in the market, as well as price inflation, are key determinants of mortgage rates, besides the Fed’s bond-buying policy.
Thus, homeowners now have an opportunity to benefit from a long period of low rates of borrowing.
UNSPLASH | A UNIQUE OPPORTUNITY TO BENEFIT FROM LOW PAYMENTS HAS PRESENTED ITSELF TO BUYERS
AVAILING THE LOWEST MORTGAGE RATES
Even though mortgage rates are historically low, it is not always possible for everyone to reap benefits by accessing the lowest mortgage deal.
The Urban Institute, in its latest findings, reported that borrowers with credit scores of 720 or above are giving in to mortgage rates 78 basis points lower than borrowers with credit scenarios of 660 or below. A basis point is one-hundredth of 1 percent, so a person that has a higher credit score can lock in at a mortgage rate of 3 percent in comparison to someone with a lower credit score, who would resultingly get a mortgage rate of 3.78 percent.
As hinted by the Mortgage Bankers Association, this entire debate is also highly dependent on the availability of credit.
UNSPLASH | THOROUGHLY ASSESS YOUR CIRCUMSTANCES BEFORE MAKING AN INVESTMENT
The positive outcome of Fed’s policy is that since mortgage rates are predicted to remain low for quite some time, borrowers with poor credit scores can strive upon improving their credibility and benefit from the lower mortgage rates.
However, before entering into a deal, your lender must be a person you can trust or have connections with through family, friends or as coworkers because as Lepre advises, lenders that you personally trust will bargain a better deal for you and even a small reduction in your APR can save you thousands throughout your loan.