The Federal Reserve recently cut interest rates to nearly zero in response to the coronavirus outbreak. Yet this strategy may not affect mortgage interest rates, even though it's aim is to boost the economy. In fact, mortgage rates have crept up in the last few weeks.
If you're eager to refinance, the good news is that mortgage rates remain relatively low. Problem is, lenders are still trying to catch up from the surge of refinancing activity that's happened lately.
To get a better idea of the factors that influence mortgage rates, read on. And educate yourself on current rate conditions and elements that could impact the real estate market in the weeks and months ahead. This could put you in a better position of confidence to lock in a low refinance rate soon. Or it can cause you to pause your refi plans for the time being.
Understanding the Fed Rate Cut
In mid-March, the Federal Reserve - the country's central bank - slashed the federal funds rate to between 0% and 0.25%.
Brandonn R. Dukes, CFA, vice president of Mortgage Solutions at Informa Financial Intelligence, says this move was made to goose the economy in wake of the coronavirus outbreak. It also increased liquidity for financial markets during a period of economic anxiety.
"Extra liquidity enables lenders to borrow money at a more affordable rate. These banks can, in turn, provide loans to consumers and businesses at very low rates," says Dukes.
The weapon the Fed can use to control inflation is interest rates, according to Victor Carlström with Vinacossa Enterprises. Today the U.S. inflation rate is around 2.3%. He explains that the Fed aims for a 2% target; this can keep the economy balanced and prevent either a recession or an overheated economy.
"But the biggest reason now for the Fed to lower interest rates is to make money cheaper for consumers to borrow, as consumers are the key to economic growth," Carlström says.
Will the Fed Rate Cut Affect Mortgage Refinance Rates?
When you hear that the government is lowering interest rates, it's easy to assume that mortgage refinance rates will drop in turn. But that's not necessarily the case.
"The federal funds rate influences short-term interest rates, which don't apply to mortgages. It's more closely linked to credit cards, personal loans, and home equity lines of credit," Dukes says."
Conforming (Fannie Mae and Freddie Mac) mortgage rates, on the other hand, are based more on the latest prices for mortgage backed securities; these are separate from the federal funds rate, explains Duke. Other factors that can affect mortgage rates include mortgage servicing values and the mortgage originator's revenue margin, which is set by the lender.
"There's also a strong correlation between mortgage rates and 10-year treasury note yields. Typically, when treasury yields rise, mortgage rates rise as well - and vice versa," says Doug Leever, mortgage sales manager with Tropical Financial Credit Union.
Interestingly, Freddie Mac reports that mortgage rates have climbed a bit since they hit an all-time low in early March. As of late March, mortgage rates have ranged between about 3.45% and 4.15% since that cut.
Predicting Refinance Rates and Home Prices
If you're considering a mortgage refi, you probably have several questions. Will COVID-19 cause rates to fall again soon? Should I lock in a low rate now in case rates trend higher? How long will it take to find a lender and close on my refi considering how busy lenders are right now?
Several experts feel that mortgage refi rates could drop further in the near future.
"I would think that rates will continue to remain low this year," Leever says. "Consider that this is an election year. And there are a lot of uncertainties about the coronavirus and its full implications on the economy."
Dukes also believes lower rates may be coming.
"The recent historical low mortgage rates have driven a substantial amount of volume for lenders, with refi rate locks hitting an all-time high a few weeks ago. These volume levels can put a strain on lender capacity," says Dukes. "One way to slow volume is to increase margins. When a lender needs to stem the flow of volume, they could raise margins to weaken their competitive position in the market. As soon as they have the capacity to fulfill loans, they may improve their competitive position by lowering margins."
Should You Refinance Now or Wait?
Reality check: attempting to refinance your mortgage in the middle of a pandemic is going to take extra time and patience. Lenders are getting slammed due to high refinance demand. With many professionals practicing social distancing and working from home, it can be harder to get all the paperwork done.
There are also risks involved here for borrowers, especially if you are pursuing a cash-out refi. Resetting your mortgage and paying more monthly than before is risky when jobs and wages are less stable. And your refi will likely involve paying thousands in closing costs, which could deplete your savings.
But if you can refinance from an adjustable rate to a low fixed rate, save more money each month, or pay less interest over the life of your loan (either by getting a lower rate or shortening your loan's term), refinancing now makes sense. To break even on the closing costs, experts recommend staying put for at least three to five years. So if you plan to move sooner than that, you might not want to refinance.
"For refinances, it's often better to take a good deal sooner, when it's available, rather than hold out for a better deal," says Phil Georgiades with FedHome Loan Centers.
Matthew Yu, Vice President of Socotra Capital, agrees.
"Now is a great time to refinance or at least line up some lenders," says Yu. He recommends shopping around for rate quotes and locking in a rate soon. Or, if you want to wait until rates drop a bit further, "Ask your lender to notify you once rates have reached your desired level."