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The Fed just pretty much guaranteed that mortgage rates will stay low

·3 min read
The Fed just pretty much guaranteed that mortgage rates will stay low
The Fed just pretty much guaranteed that mortgage rates will stay low

With coronavirus infections spiking across the country, Chairman Jerome Powell and his colleagues at the Federal Reserve have announced they're keeping a key interest rate near zero — which promises to help mortgage rates stay at record lows.

At the end of a two-day meeting on Wednesday, central bank officials also said they intend to keep buying up Treasury bonds and mortgage-backed securities until employment numbers improve. Those purchases are contributing to today’s deeply cheap mortgage rates.

While ultra-low interest rates won’t help your savings account, they’ve been a windfall for borrowers.

Enthusiastic homebuyers — and homeowners looking to refinance their existing mortgages — can lock in rock-bottom rates and score low monthly mortgage payments.

Low interest rates will stick around

Federal Reserve building
Wikimedia Commons

Fed officials say in a statement that they decided to make no change to their benchmark interest rate, called the federal funds rate. The rate has been close to zero since March, when it was first slashed in response to the economic effects of the pandemic.

The central bank wants to keep interest rates low until the nation’s weak inflation rate increases to over 2%. The latest forecast from Fed policymakers indicates you can expect no rate hikes before 2024.

The Fed also announced it would expand its bond-buying program by purchasing $80 billion in Treasury bonds each month and at least $40 billion in mortgage-backed securities. Those are investments made up of bundles of home loans.

“The Fed reinstated the asset purchase program to stop the meltdown in credit markets in March, which threatened to eclipse that of the global financial crisis in 2008-09,” explains Diane Swonk, chief economist at the accounting firm Grant Thornton.

The link to low mortgage rates

Loving couple looking at their dream house
ESB Professional / Shutterstock

The Fed’s deeply low benchmark interest rate most closely impacts the prime rate — the interest rate that lenders offer to their best borrowers.

But even though the federal funds rate doesn’t directly move the needle on mortgage rates, the low-interest rate environment has helped push mortgage rates to record lows this year.

Rates on 30-year fixed-rate home loans have been lingering at the all-time low 2.71%, according to the long-running weekly survey from mortgage giant Freddie Mac.

Cheap borrowing costs have sent Americans flocking to the housing market. Even with average home prices growing and inventory shrinking, low rates are still helping homebuyers save cash, according to experts at Realtor.com.

Homeowners also have been delighted to see shrinking rates this year, and have been refinancing their mortgages to cut monthly expenses. But mortgage technology and data provider Black Knight says another another 19 million mortgage holders could save an average $308 per month by refinancing now.

Lock in super-low rates

Young smiling happy couple talking at home in the kitchen with laptop papers,
fizkes / Shutterstock

For those looking to take advantage of rock-bottom rates, it might seem there’s no need to rush.

But several factors could push rates back up in the coming months.

After a 0.5% refinance fee went into effect Dec. 1, experts say many lenders are now rolling the cost into their refi rates.

And, while rises in new COVID cases are darkening the short-term economic forecast, the beginnings of a vaccine rollout are helping investors imagine a return to normalcy in the months ahead. Mortgage rates initially jumped when Pfizer first announced that an effective vaccine was in reach last month.

The best way to find the lowest mortgage rate is by shopping around. Compare loan offers from different lenders, because rates can vary from one to the next.

Once you’ve found one of those ultra-low rates, request a rate lock so it doesn’t jump before your loan is finalized. And for additional savings, shop around for your home insurance whenever you buy or renew your coverage.