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How Mortgage Rates Are Tied to the Fed Interest Rate

Mortgage rates are a hot topic right now in real estate. Will they continue to rise? Will they ever be as low as they were pre-COVID? Will they even get back to 5%? I'm not sure anyone really knows exactly if or when mortgage rates will retreat back to a point where current owners will be willing to sell and those waiting on the sidelines to buy will be ready to pull the trigger and make that purchase.

We all see the headlines about the Federal Reserve raising their benchmark interest rate. Also known as the federal funds rate, it is a key indicator of the direction of the economy. But what does it mean and how do these increases affect mortgage rates? Below is the explanation.

When the Fed raises the federal funds rate, it makes it more expensive for banks to borrow money from each other. This, in turn, can lead to higher interest rates on mortgages and other loans.

The relationship between the Fed funds rate and mortgage rates is not direct. There are a number of other factors that can also affect mortgage rates, such as inflation, the housing market, and investor sentiment. However, the Fed funds rate is one of the most important factors that lenders consider when setting mortgage rates.

In general, when the Fed raises the federal funds rate, mortgage rates tend to follow. This is because lenders need to earn a profit on their loans, so they will typically pass on any increases in the cost of borrowing to borrowers. The opposite is also true. When the Fed lowers the federal funds rate, mortgage rates tend to fall. This is because lenders can borrow money more cheaply, which gives them more room to offer lower interest rates on mortgages.

If you are thinking about buying a home, here are some additional things to keep in mind about the relationship between mortgage rates and the Fed funds rate:

  • The spread between the Fed funds rate and mortgage rates can vary depending on a number of factors, such as the state of the economy and the demand for mortgages.

  • The Fed funds rate is not the only factor that affects mortgage rates. Other factors, such as inflation, the housing market, and investor sentiment, can also play a role.

It is important to shop around for a mortgage when you are buying a home. Different lenders may offer different interest rates, so it is important to compare rates before you choose a lender. Your real estate agent is a great source when attempting to find the right lender.

As a Broker-Associate, Jason Holt is a full-service real estate agent with Chinowth & Cohen REALTORS in Tulsa, Oklahoma. Jason is dedicated to buyers and sellers of residential, ranch, and land listings in Tulsa, Muskogee, McIntosh, Wagoner, and surrounding Oklahoma counties. He is also passionate about helping all first responders and military members navigate the real estate process. If you're looking for a REALTOR you can trust to help you through any real estate transaction, contact Jason at 918.995.0534.

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