Some experts will tell home buyers that they don’t need to worry about the federal funds rate because it doesn’t directly influence mortgage rates. This is generally true, but there are some correlations between the two numbers that home buyers might want to investigate before they decide when to purchase new homes.
What are Federal Funds Rates?
It’s easiest to understand the federal funds rate by thinking of it as the interest rate that banks charge other banks when they lend each other money. This isn’t a precise definition (lending institutions, for instance, don’t have to be banks), but it’s a functional definition that works well within the context of talking about how the federal funds rate might affect mortgage rates.
The federal funds rate is set by the Federal Reserve. In general, the Fed will lower rates during recessions because it encourages banks and other financial institutions to lend more money. It quickly becomes complicated and opinions differ wildly about whether or not the Fed should raise rates at any given time.
Does the Federal Funds Rate Affect Mortgage Rates?
That depends on who you ask. Many experts claim that the federal funds rate does not have a direct influence on mortgage rates. If you have done any reading about this subject already, though, then you might have found several graphs that show the history of mortgage rates and federal funds rates. And if you have looked at those graphs, then you might question the validity of such an expert’s opinion.
It is accurate to say that changes in the federal funds rate do not always influence mortgage rates. But it’s very hard to deny that these two numbers have histories that line up rather frequently.
Naysayers will suggest that the related peaks and dips in the two numbers are actually an effect of the overall economy. In other words, the federal funds rate doesn’t affect the mortgage rate, but both rates are affected by similar economic circumstances.
Changing the Federal Funds Rate and Mortgage Rates
Whether or not changing the federal funds rate has a direct influence over mortgage rates, there is clearly some connection. Experts can continue to argue over the fine points of this connection, but most home buyers know that they tend to get better deals on mortgages when the federal funds rate is low.
This makes sense from a theoretical perspective. After all, if the Fed lowers the federal funds rate, then banks can lend each other money at cheaper prices. Why, then, shouldn’t they be able to loan homebuyers money at cheaper prices as well?
The Future of Mortgage Rates
What does all of this mean for the future of mortgage rates?
Well, it probably means that they are going up. A recession will almost always tempt the Fed to lower its rates, and that’s just what happened at the beginning of the most recent downturn. It’s no surprise, then, that mortgage rates dropped to historically significant lows.
As the economy stabilizes, though, these numbers are going to start creeping up. You can already see it happening. Those who get mortgages now generally get higher rates than they would have a year ago.
Related from WalletGenius
Saving MoneyFree Food For March 2021: The Best Restaurant Deals We Found
Saving Money3 Simple Lifestyle Changes That Will Save You Money
Saving MoneyHow To Save Money With Electric Heat
Saving MoneyFree TV Apps Worth Trying in 2021
UtilitiesThe Best Ways To Save Money On Your Water Bill
Saving MoneyThe Best Ways to Save Money on Gym Memberships
GroceriesThe Best Ways to Save Money on Groceries
Gift Ideas15 Walmart Black Friday Deals You Can’t Miss This Year
Gift Ideas15 Black Friday Deals To Get Your Christmas Shopping Done Early
Gift Ideas12 Products That Are Almost Guaranteed To Be Sold Out By Black Friday
Gift Ideas15 Black Friday Deals Seniors Are Going to Line Up For
Gift Ideas20 Black Friday Deals Moms Are Going to Line Up For