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With the Fed's help, mortgage rates could stay low for a long time

MoneyWise logoMoneyWise 9/16/2020 Doug Whiteman
a man wearing a suit and tie: Fed could help mortgage rates stay lower longer © Tasos Katopodis / POOL / EPA-EFE / Shutterstock Fed could help mortgage rates stay lower longer

The Federal Reserve has reevaluated how the coronavirus pandemic is chewing up the U.S. economy, and Chairman Jerome Powell and his colleagues have decided to stick with strategies contributing to all-time-low mortgage rates.

The central bank will continue to hold a key interest rate at next to nothing — maybe through the end of 2023, a new Fed forecast indicates. And the institution will keep buying up certain types of investments, for the good of the economy.

These policies have helped homebuyers and refinancing homeowners land 30-year mortgage rates under 3%, which used to be unthinkable.

But the Fed does have one potential spoiler for mortgage borrowers: its new position on inflation.

The Fed isn't messing with interest rates

a large stone statue in front of a building: Thomas Barrat / Shutterstock The Fed is keeping the interest rate it controls at an all-time low. © Provided by MoneyWise Thomas Barrat / Shutterstock The Fed is keeping the interest rate it controls at an all-time low.

At the close of a two-day policy meeting, the Fed announced on Wednesday that it's keeping its benchmark interest rate — called the federal funds rate — near zero. That's where things have stood since March, when officials slashed rates while the COVID-19 outbreak began hitting the economy hard.

Projections released after the meeting show 13 out of 17 members of the Federal Reserve policy panel don't expect a rate increase before 2024.

The coronavirus is still causing hardships and holding back economic activity and employment, the Fed says.

To foster "the flow of credit to households and businesses" during the crisis, the central bank says it will continue its program of purchasing mortgage-backed securities and Treasury bonds. That buying has helped drive down mortgage rates and bond yields.

The Fed's post-meeting statement refers to the central bank's new and looser stance on inflation; it says policymakers "will aim to achieve inflation moderately above 2% for some time so that inflation averages 2% over time." The Fed's goal is 2% inflation, but prices have been rising at a stubbornly slower pace.

The meaning for mortgage rates

Andrii Yalanskyi / Shutterstock The Fed is contributing to record-low mortgage rates. © Provided by MoneyWise Andrii Yalanskyi / Shutterstock The Fed is contributing to record-low mortgage rates.

The ultra-low federal funds rate is having a direct effect on the prime rate and other borrowing costs that piggyback off the prime, including the APRs on credit cards and the interest on adjustable-rate mortgages and home equity lines of credit, or HELOCs.

But the Fed's rate isn't tied closely to fixed mortgage rates, including rates on popular 30-year fixed-rate mortgages.

Still, home lending rates keep dropping through the floor with help from the low-interest environment the Fed's COVID-fighting tactics have helped create.

The average for 30-year loans fell all the way down to an unprecedented 2.86% last week, according to the nearly 50-year-old survey from mortgage company Freddie Mac.

More than 19 million homeowners could refinance at today's rates and save an average of $299 per month, the mortgage data firm Black Knight says. And, as low rates entice homebuyers, home sales are soaring.

Why mortgage rates could still rise

a woman standing in a room: stockfour / Shutterstock Inflation could push up mortgage rates. © Provided by MoneyWise stockfour / Shutterstock Inflation could push up mortgage rates.

There are a couple of potential threats to the extreme mortgage rates borrowers are getting used to.

Inflation could become a problem, depending on how long the Fed lets it run hot. Rising inflation often brings higher interest rates.

But that's not an issue now. "Weaker demand and significantly lower oil prices are holding down consumer price inflation," the Fed says.

Another risk comes from a new fee that'll be tacked onto refinance loans; lenders are expected to pass that cost along to consumers in the form of higher mortgage rates.

So, while the Fed is likely to stay friendly to borrowers for a long time, you may not want to wait if you're hoping to score a low rate to buy a home or do a refi.

To shop around for a great rate, compare mortgage offers from multiple lenders — because there can be big differences from one lender to the next.

Remember to take the same approach when the time comes to buy or renew your homeowners insurance. Check rates from several insurers to be certain you're getting the right coverage at the best price.

Video: Borrowers extend coronavirus mortgage bailouts as foreclosure risk rises (CNBC)


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