In the midst of market uncertainty and the worldwide outbreak of COVID-19, the Federal Reserve unanimously approved their biggest one-time rate cut since the 2008 financial crisis. In March, the Fed made two announcements cutting its benchmark federal funds rate by 1.5% to a range of 0% to 0.25% as the coronavirus outbreak continued to spread across the US. As a reminder to homebuyers and those who currently own a home, rates are historically low, but this most recent cut will not guarantee that home loan rates will drop to 0%, or close to it.
As many Americans wonder if this cut will be enough to protect the economy throughout the coronavirus outbreak, several economists predict the US could still face a significant slowdown, or possibly even a recession.
The Fed & Mortgage Rates
Contrary to popular belief, the Fed doesn’t have a direct correlation to mortgage rates. For example, just because the Fed announced an emergency cut of .5%, that doesn’t mean your mortgage rate will be .5% lower. Although it isn’t uncommon for mortgage rates to follow market trends influenced by the Fed, there is no guarantee that this emergency cut will directly benefit homeowners over the next few months.
An easy way to remember it is like this:
- The Federal Reserve adjusts short-term interest rates in an attempt to protect and sustain current economic growth
- Mortgage rates fluctuate based on the long-term bond rate
There is still a chance that mortgage rates will follow suit, which is good news for homebuyers. According to HousingWire, “The emergency rate cut will … likely result in lower borrowing costs for homeowners with variable-rate home equity loans that are indexed to the U.S. prime rate, which moves in tandem with the Fed rate.”
Refinances Increase Among Low Rates
Regardless of any potential movement in mortgage rates, homeowners are currently taking advantage of the historically low mortgage rates by refinancing their current mortgage.
MORTGAGE TERM: Mortgage refinancing is the process of paying off one loan with the proceeds from a new loan secured for the same property.
Refinancing is usually done to secure better loan terms than your current loan, like a lower interest rate or a lower monthly payment. Other reasons you may want to refinance could include:
- Investing in your long-term plans
- Making home renovations
- Consolidating debt
Traditionally, it’s been said that refinancing is beneficial if you can reduce your rate by at least 2%. However, some lenders say that even a 1% savings is a great enough incentive to consider refinancing your home. Currently, rates are low, so now might be the best time for you to refinance. (We always recommend speaking to a mortgage professional first.)