“The Fed raised the basis points again, so this means that interest rates have gone up.” This is not always the case! Right now, more than ever, it is crucial for prospective buyers and sellers to be in the know regarding rates and how they fluctuate. Even the smallest mortgage rate decreases results in more showings. To understand mortgage rates, we have to learn their correlation to the Fed, and in turn, their basis point changes. 

Last Wednesday, the Federal Reserve implemented its second 0.75 percentage point interest rate increase for the purpose of reining in inflation without encouraging a recession. Many people are under the impression that this rate hike is exclusively for mortgages. In actuality, this change is directly to the federal funds rate. Mortgage rates are a trickle effect. 

The Federal funds rate determines how much interest financial institutions can charge one another to borrow money overnight. However, there are so many other rates and factors in the economy that are tied to lending as a whole. Any increase by the Fed has a direct impact on interest consumers pay when they carry debt, take out a loan, yields on savings accounts, etc. A nearly exclusive list of factors that play into mortgage rates are the Federal Reserve, Bond Market, Secured Overnight Finance Rate, Constant Maturity Treasury Rate, Economic Health, Inflation, and Recession.

All of this is great, but what does it mean for mortgage rates? That’s what this audience cares about! Long story short, interest rates are back in the upper 4%. Why? The Fed hikes rates to cool the economy, and if successful in their efforts, mortgage rates may remain the same or come down slightly. We are currently in the latter scenario. However, if the hike is unsuccessful, then costs of mortgages could again trend upwards, along with most goods and services. If the economy rapidly cools and recession is imminent, rates could drop again.

At the end of the day, this is the best (full picture) way to look at rates. The Fed adjusts basis points based on inflation and recession stats, and this directly affects lending institutions. Lending institutions take into account many other factors before setting interest rates for home loans. We are in the day and age of media driven fear, and sometimes a second opinion or explanation can alleviate some stress. As in any market – purchase within your means in such a way that aligns with your long term investment goals. Real estate is an amazing addition to your portfolio, regardless of rates. There are many other factors that are just as, if not more, important.