Why a 0% Fed Rate Doesn’t Mean a 0% Mortgage Rate for the Consumer

0% Fed Rate

Your borrowers are probably watching the news just as much as you are, and they have questions about the new 0% Fed rate. 

0% Fed Rate

Specifically, “Does the 0% Fed rate mean that I can get a 0% mortgage rate?”

Here are your borrower’s questions you should be able to answer:

  1. What is the Federal Reserve?
  2. What’s the Fed rate? 
  3. Why did the Fed issue an emergency cut? 
  4. How are the Fed rate and mortgage rates connected? 
  5. What does this mean for your borrowers?

What is the Federal Reserve?

The Federal Reserve is the central bank of the United States. The Federal Reserve–or the Fed–has three primary objectives: to maximize employment, stabilize prices, and moderate long-term interest rates. The Fed is also responsible for supervising banks and maintaining the overall stability of the financial system. 

What’s the Fed Rate?

The federal funds rate is the interest rate target for banks to borrow and lend money. This is set by the Fed about eight times a year, and is based upon economic conditions. The Fed Rate can affect the stock market, as well as influence shorter term rates, such as consumer loans or credit cards. 

Why Did the Fed Issue An Emergency Cut?

In response to the COVID-19 pandemic, the Fed cut rates twice, lowering the rate to almost zero. When the Fed rates are low, the Federal Reserve is attempting to encourage economic growth. 

How are the Fed Rate and Mortgage Rates Connected?

It’s a common misunderstanding, but the Federal Reserve does not determine mortgage rates. The Fed decides the federal funds rate. Since this is the rate that banks and financial institutions can lend money to each other, when the Fed rate increases, it becomes more expensive for one bank to borrow from another bank. This can lead to increased costs for the consumer, through increased interest rates. 

However, changes in the Fed rate are not always reflected in mortgage rates. For example, in the past two decades, the Fed rate and the average 30-year fixed mortgage rate has differed by as much as 5.25%, and as little as 0.5%

What Does This Mean For Your Borrowers?

Even though the Fed rate does not determine mortgage rates, it does affect them. And you and your borrowers both know that mortgage rates have hit all-time lows in the past couple of weeks, making refinancing and new home mortgages more appealing than ever. 

It’s important to help your borrower understand that lenders are raising mortgage rates in response to the record demand. So, it may not be the ideal time for all of your customers to apply. 

However, it is still a good time for millions of borrowers to consider a refinance. Reducing monthly costs can be a huge boost for your clients, especially in the face of an uncertain economy. 

Bottom Line

Your customers are curious about the Fed rate, and it’s critical that you are able to answer their questions in terms they will understand. Watching the news and looking for information online may be leading to confusion for them, so step in, and offer guidance as an informed voice of reason. 

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