Saturday
August 27, 2016

Fed Leaves Rates Alone: What This Means for Mortgages

      |
-A A +A

Fed Leaves Rates Alone: What This Means for Mortgages

The Federal Reserve announced Wednesday that it will not raise interest rates as quickly as they had originally anticipated. The Fed dimmed its outlook as the economy showed signs of slowing.

This means short-term interest rates will stay steady. The Fed’s benchmark rate likely will increase just twice this year, down from their original prediction of four.

Read more: Fed Tightening Sparks a Yawn

The initial increase to the Fed’s short-term rate – which was near zero since 2008 -- occurred in December of 2015. By the end of this year, the rate likely will rise to 0.875 percent, according to a median projection of 17 officials following the Fed’s meeting this week. Officials largely see June as the next probable time for a slight increase. 

Some Fed officials were concerned that increasing rates too quickly could stifle an economic recovery.

"Caution is appropriate," Fed Chairwoman Janet Yellen said at a press conference.

What could this mean for mortgage rates? Rates are only loosely tied to the Fed’s short-term rates, but the Fed’s actions do have some influence and this could keep mortgage rates down in the coming months.

As of now, the 30-year fixed-rate mortgage remains near a three-year low. Nevertheless, it has been inching up. Since Feb. 11, the average 30-year fixed-rate has risen nearly 20 basis points.

“That translates into a reduction of buying power by more than 2 percent,” notes Jonathan Smoke, realtor.com®’s chief economist. “For potential buyers, these rate movements can be nerve-wracking. A 10 basis–point difference in a rate on a mortgage, with all other factors remaining the same, will produce a 1.2 percent difference on the monthly payment. Of course that affects not just your monthly budget, but also your debt-to-income ratio, which is a critical factor in qualifying for a mortgage.”

As rates have fallen over the last few years, buyers have obtained about 6 percent more in buying power, Smoke says. Since then, however, the market has taken back nearly 2 percent in buying power, Smoke notes. Mortgage rates that inch up to 4.22 percent – which is largely predicted to happen over this year -- means that the mortgage market will have then taken back all of the buying power and also removed an additional 1.5 percent of buying power.

“As we enter the peak spring buying season, it’ll be even more critical to follow the movements of mortgage rates,” Smoke says. “Buyers who think those rates aren’t moving might have a rude awakening when they realize the recent trend upward.”

Source: “Fed Dials Back Pace of Rate Hikes,” The Wall Street Journal (March 17, 2016) [Log-in required.] and “After Throwing Us a Curveball, Where Will Mortgage Rates Go?” realtor.com® (March 10, 2016)