What Does a 0% Interest Rate Mean for Mortgages?
Will a 0% interest rate affect homeowners?
Assuming you haven’t been living under a rock in recent weeks, you’ve almost definitely heard that the Federal Reserve has cut interest rates to 0% in an attempt to counteract the recent slowing of the economy. Depending on your point of view, that can either sound exciting or scary. When you hear “0% interest rate,” it’s only natural to think about what it means for credit cards and mortgages, but what does a 0% interest rate actually mean for you? The Federal interest rate doesn’t specifically define mortgage rates, but it does impact them. Whether you already have a mortgage or you’re looking to get one, here’s how the rate cut will affect you.
The Federal interest rate doesn’t specifically define mortgage rates, but it does impact them.
First things first. What’s the Federal Reserve?
Before you can understand how a 0% interest rate will impact the mortgage industry, you have to first understand what the Federal Reserve does. Think of the Federal Reserve, or the Fed, as the gatekeeper of the U.S. economy. It’s the central bank of the U.S., meaning it’s the bank of banks and the bank of the U.S. government. Within the Fed lies the Federal Open Market Committee (FMOC). The job of the FOMC is to establish policies that help govern and regulate the economy, including inflation rates, the supply of money, economic growth and expansion, and define the cost of credit through the Federal interest rate.
The Federal rate defines the cost of short-term borrowing for banks and other financial institutions borrowing and lending money to each other. In theory, a low Federal rate should promote financial institutions to continue operating as usual, borrowing and lending money freely, despite a slowing economy. Hence the current rate cut. Sounds good, but what does this mean for you?
How will this affect my mortgage?
Interest rates are still near historic lows, but over the past week or so mortgage rates have actually increased despite the Federal rate cut. The mortgage market more closely resembles Treasury yields, which saw an increase right after the Fed announced their plan. If you’re looking for a mortgage, you can lock in a relatively low rate now, or wait it out to see whether rates return to the historic lows of months past once the dust settles.
The same logic applies if you’re looking to refinance. Since the 0% interest rate was announced, refinance applications rose by 4% in just one week. The surge in new refinance applications also played a role in motivating banks to increase mortgage rates for the time being. Refinancing at the current rates would make sense for current homeowners with higher interest rates, but as I stated earlier, mortgage rates may come back down if you’re looking to play the waiting game. Either way, refinancing is always a solid option if the current rate is lower than what you’re paying.
Will this make a difference in real estate prices and returns?
The whole idea behind lowering an interest rate is to increase the incentive for borrowing money. However, today’s crisis leaves a lot of uncertainty in the direction of the market. Each day is bringing new updates and policy changes to the financial market and operation of the economy. Even though the Fed cut rates to stimulate the economy, real estate movement has slowed to a halt in many places. With recent “shelter-in-place” orders being placed in several cities across the country, fewer houses are being shown and even fewer are being sold. Only time will tell how this will all play out, but it’s likely we’ll see a relatively flat real estate market until the COVID-19 crisis blows over.
With so much uncertainty in the air and changes coming from left and right, it’s only natural to have financial questions. Especially if you’re in the middle of house hunting, or looking to apply for or refinance a mortgage. In times like these, it’s important to prioritize your health and safety first and foremost, but if there’s any way we can help you find answers to your questions, don’t hesitate to reach out to Cardinal Financial. We’re still here and still committed to getting you the answers you need and the service you deserve.
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