Recently, we’ve been hearing that the Federal Reserve is increasing short-term interest rates. There are common misconceptions about what happens when there is an increase in the Federal Funds Rate (FFR).
Does it mean that mortgage rates go up? What actually happens to mortgage interest rates when the Fed increases the FFR?
Let’s break it down!
The truth is that in most cases, mortgage interest rates will usually go DOWN The FFR directly affects short-term interest rates like auto loans, credit cards and home equity lines of credit, NOT mortgage interest rates.
Mortgage interest rates stem from the bond market & the US treasury. They are not directly tied to the FFR, nor are they the same thing. The bond market sees an increase in the interest rate from the Fed as a positive in fighting inflation, and therefore mortgage rates decrease
Inflation, however, will cause mortgage interest rates to rise and is one of the major factors contributing to why interest rates have been climbing this year. This is why the Fed has been increasing the short-term interest rate, to curb inflation by slowing the economy.
Once inflation is under control, mortgage interest rates should start coming back down.
Does this make sense to you? If you have any questions, reach out! We want to help make it as clear as possible and want to make sure your home-buying and mortgage experience is as smooth as it possibly can be! We are here for YOU!