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The Fed just did its part so ultra-low mortgage rates will stick around

Shane Murphy
·3 min read
The Fed just did its part so ultra-low mortgage rates will stick around
The Fed just did its part so ultra-low mortgage rates will stick around

The Federal Reserve has decided to stay under the radar and hold steady with policies that have helped push mortgage rates to all-time lows.

Following a two-day meeting in the midst of the hotly-contested election, Fed Chairman Jerome Powell (pictured) and his colleagues announced on Thursday that the central bank would keep its benchmark interest rate close to zero and continue to purchase investments that will ensure rates stay down for the foreseeable future.

Though that means savings will continue to earn pathetic interest (sorry, savers), homebuyers and homeowners looking to refinance now have the chance to lock in 30-year mortgages at rates well under 3%, and the Fed’s projections show interest rates could stay at rock bottom until 2024.

Interest rates aren’t changing anytime soon

Federal Reserve Building in Washington DC
Orhan Cam / Shutterstock
The Federal Reserve building in Washington, D.C.

The Fed’s benchmark interest rate — known as the federal funds rate — has been hovering around zero since March, when officials slashed it in response to the economic effects of the pandemic.

With cases of COVID-19 spiking again across the U.S., the central bank re-pledged not to increase the federal funds rate until the economy reaches maximum employment and inflation increases to over 2%.

The Fed also stayed committed to increasing its holdings of Treasury and mortgage-backed securities over the coming months, which it says will “sustain smooth market functioning” and “[support] the flow of credit to households and businesses.”

This strategy should “help keep longer term rates, including mortgage rates, low,” says Danielle Hale, chief economist for Realtor.com.

"The economy is still healing and may be doing so at a slower pace," says Hale. "The Fed has done its part to reassure skittish investors that it is alert and will continue to support the economy as needed."

What this means for your mortgage

Modern style suburban home
Suzanne Tucker / Shutterstock
The Fed has created a climate for seriously low rates on home loans.

The Fed’s ultra-low benchmark interest rate has a direct impact on the prime rate and related borrowing costs, like credit card APRs, rates on adjustable-rate mortgages, and home equity lines of credit.

And although the federal funds rate isn’t tied closely to fixed mortgage rates, the low-interest environment created by the Fed’s COVID response has caused rates on 30-year fixed-rate mortgages to plunge lower than ever.

Last week, the average for 30-year fixed-rate loans dropped to 2.78%, according to mortgage company Freddie Mac. It was the 12th time this year that rates have set a new record low; Freddie Mac began tracking mortgage rates almost five decades ago.

As a result of bargain-basement mortgage rates, home sales are soaring.

However, huge numbers of Americans are missing out on the chance to refinance their current mortgages. The data firm Black Knight estimated last week that 18.5 million homeowners could save an average $304 per month by refinancing into one of today’s bargain rates.

Could rates still rise?

A positive housing market concept and graph
Tyler Olson / Shutterstock

Although interest rates are projected to stay low for years to come, a new 0.5% fee on refi loans could cut into your savings if you wait much longer to refinance.

The fee officially comes into effect on Dec. 1, although some lenders have already started building it into their pricing.

To find the best rate on a new mortgage or a refinance, it’s wise to compare offers from multiple lenders — because there can be big differences from one lender to the next.

You can use the same approach with your homeowners insurance: Shop around and get quotes from several different companies to make sure you’re getting the best price.