The Federal Reserve does not set mortgage rates, but it does affect banks, and banks can pass those reductions on to the consumer. (iStock)
In March, the Fed issued emergency rate cuts on loans. The spread of COVID-19 and subsequent restrictions at the federal, state, and local level, have taken their toll on the economy. With more people seeking unemployment and businesses losing money, the Federal Reserve wanted to encourage spending.
While the Fed aimed the reduced rates at business spending, the lower interest rates will affect various financial tools, including personal loans, credit cards, and mortgage loans.
How does the fed rate affect mortgages?
The Federal Reserve does not set mortgage rates, but it does affect banks, and banks can pass those reductions on to the consumer. The standards set by the Fed help banks decide what prices to use when navigating bank-to-bank lending. Typically banks and other lenders lower their interest rates to more accurately reflect the Fed rate. In turn, lenders lower their rates to attract more consumers.
The lower federal rate may or may not affect your mortgage, depending on the type of loan you have.
If you have a fixed-rate mortgage, you won’t see any changes unless you opt to refinance your home loan. If you have an adjustable-rate mortgage (ARM), your monthly payments will typically go down.
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How you benefit from low-interest rates right now
Homeowners and property owners could benefit a lot from these emergency cuts.
If you have enough equity in your property, consider refinancing your loan for a lower interest rate. Consumers should note that following these emergency cuts, prices have fluctuated, and many lenders have seen an influx of applications. The increased interest in loans and refinancing could make it more difficult to apply or increase your waiting period before approval.
If you’ve been considering a home-equity line of credit, now may be an excellent time to apply as these loans are tied to the federal benchmark, unlike some longer-term mortgages; alternatively, you may also benefit from a cash-out refinance.
If you’re trying to buy a home, you may or may not be able to take advantage of lower interest rates. Check with lenders in your area to see how mortgage rates have been affected.
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In addition to mortgage rates, you may also be able to save money on new personal loans, car loans and credit card rates.
What should ARM borrowers do during Fed Rate cuts?
Adjustable-rate mortgages are an excellent short-term option for borrowers because they’re easier to qualify for, and they’re less likely to reach the maximum rate in five to seven years. If you have an adjustable-rate loan, you may want to consider refinancing to a fixed-rate loan while the prices are still low. This is especially true if you’re nearing or past your introductory rate period. Alternatively, you could also refinance to another ARM loan with a lower interest rate.
If you’re considering refinancing your home loan, make sure you know whether rates in your area are going down. While many states are seeing a reduction in interest rates, it may not be accurate for every community.
Keep in mind that if you do choose to refinance, there will be fees associated with the process. Do a little math to make sure the expense is worth the effort.
If you can’t or don’t want to refinance your mortgage, start setting extra money aside for when rates go back up as your monthly payment will increase again. Consider setting aside the difference between your lower monthly rate and your higher monthly rate, so you have money set aside as a buffer.
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While many people could benefit from the emergency interest rate cut, some may lose a little. For example, customers may see a reduction in the interest rate on interest-bearing savings accounts. You may also want to wait to buy into CDs or money market accounts to secure higher returns. If you already have a CD or money market account, your current rate is locked in, so you won’t see any changes.
As the financial market continues to face some uncertainty, taking the time to see if you could benefit from the Federal Reserve’s emergency interest rate cut could save you thousands of dollars, and give you a little more breathing room.