In the second week of June, the Fed announced important policies that influence mortgage rates. FederalReserve.gov published a statement announcing monetary policy from the Federal Open Market Committee including:
- The Board of Governors of the Federal Reserve System voted unanimously to maintain the interest rate paid on required and excess reserve balances at 0.10 percent, effective June 11, 2020.
- As part of its policy decision, the Federal Open Market Committee voted to authorize and direct the Open Market Desk at the Federal Reserve Bank of New York to run “open market operations as necessary to maintain the federal funds rate in a target range of 0 to 1/4 percent”;
- The vote also authorized an “Increase the System Open Market Account holdings of Treasury securities, agency mortgage-backed securities (MBS), and agency commercial mortgage-backed securities (CMBS) at least at the current pace to sustain smooth functioning of markets for these securities, thereby fostering effective transmission of monetary policy to broader financial conditions.”
The Fed does not directly change mortgage loan interest rates when it regulates interest, but as we’ll explore below, the Fed’s purchase of mortgage-backed securities can (and in this case DOES) help keep rates lower.
The mortgage loan rates are offered to borrowers with the best financial qualifications, but in an age of market volatility, the lower rates can benefit more borrowers–especially those who understand how their credit scores and loan repayment history affects their ability to be offered the most competitive rates.
As mentioned above, home loan interest rates are not directly controlled by the Fed, but investor reaction to Fed policy statements does affect rates. Some things the Fed does will directly result in lower mortgage rates; the Fed has committed to more bond purchases making the Fed an important buyer of mortgage debt–that demand influences rates.
The Fed has also discussed the concept of a zero-percent interest rate or a near-zero rate. This is not directly relevant to mortgage loan interest rates–that rate applies to something called the Fed Funds Rate, not the mortgage industry.
There are other factors that influence today’s low rates, but the Fed bond buying program is an important part of that.
At the time of this writing, rates are lower, demand may be higher, and borrowers who want to get the best mortgage loan for the money need to evaluate the timing of their loan application. How ready is your credit? Do you have lates or missed payments in the 12 months ahead of your mortgage?
Do you know how competitive your housing market is at the time you want to apply for the loan? Higher demand means busier lenders–and busy lenders can afford to be more choosy when it comes time to approve the loans.
If you do have lower credit scores if you bring a higher down payment to the process your lender may be more willing to work with you in spite of the scores. It’s best to begin monitoring your credit as early as possible, work on reducing your debt ratio, and avoid opening new lines of credit in the year leading up to your mortgage loan.