Monitoring the Federal Reserve Rates for Better Mortgage Refinancing Decision

There are plenty of influential factors that affect the housing market, but there probably is not something as important as the Federal Reserve that handles the interest rate. If you consider all things same, the lower the interest rates levied by the Federal Reserve, the lower the mortgage rate you can get when it comes to buying or refinancing a home.

Let us understand this more in detail. We all know about the economy crash of 2008, the real estate market tumbled big-time and the Federal Reserve moved in to lower the interest rates. Now we know that when the interest rates are low, housing becomes cheaper, there is more likelihood of real estate transactions to transpire and there is a sense of stabilization in the residential real estate scenario. So a big hint to where the real estate market for residents is going lies in the direction of the interest rates.

The federal funds rate is what banks and financial lending institutions charge each other for borrowing funds. During the end of 2007, the federal funds rate was about 4 percent. The federal government was selling ten year Treasury notes at about 4.5 percent while the thirty year fixed mortgage was pegged at 6.17 percent. Between the end of 2008 and January 2009, the Fed declared that it wanted to reduce the fed funds rate between 0 percent and 0.25 percent, essentially making banks borrow from one another at nearly no cost. Due to this, the interest rates on the ten year Treasury notes have gone down to 3.8 percent and the average 30 year fixed rate mortgage sits at 4.9 percent.
We can say that the Fed’s policy to reduce the interest rates have been successful. There is also a point of view that the Fed will increase the rates to keep inflation in control. However the Fed being rather transparent with its decisions said that it has no intention of increasing rates in the future. So, you can expect a formal announcement before this happens. Since the market is unpredictable, But you have to do your own homework and note down signs that hint towards increasing interest rates.

You should closely monitor the unemployment rate which was about 9.8 percent recently. So if this rate comes down quickly, the Fed may begin to increase the rates. Also keep a watch on the discount rate, the interest rate the Fed levies on the banks that borrow from it directly. If it stands to rise higher than the current 0.5 percent, then the Federal rates begins to increase, a sure-shot sign that the interest rates and subsequently the mortgage rates will rise.
So, if your 30 year mortgage rate, for instance, starts to rise higher than other interest rates, , it’s a sure sign that your neighborhood mortgage broker senses a Fed rate rise coming up and that the mortgage rate should climb up. So if you want to buy or refinance a home, this is the time to do so before rates begin to move up again.