Homebuyers and homeowners alike love today’s record mortgage rates, which have averaged less than 3% for the first time. As rates have made history this month, mortgage applications have been on the rise.
Borrowers owe a big thanks to the Federal Reserve for falling rates on new and refinance home loans, and the Fed policymakers meeting this week could help them go even lower.
The United States central bank is expected to continue and even sharpen its anti-coronavirus policies that have lowered interest rates. Fed officials are also likely to spread more sadness about the economy, and when Fed Chief Jerome Powell and his colleagues get grim, mortgage rates tend to drop.
What the Fed is likely to do
Let’s clarify this first: No one expects the Fed to make interest rate changes this week.
The Federal Reserve cut its key rate to near zero in March to dampen the pandemic economy, and forecasts released after last month’s policy meeting indicated that what is called the federal funds rate will remain close to zero at less until the end of 2022.
Some economists say that the Fed could do this week is offer more information on how long rates are likely to stay at next to nothing. In other words, what would it take for policymakers to raise interest rates again?
Diane Swonk, chief economist at accounting firm Grant Thornton, says the Fed should explain that it will keep rates low until inflation is above 2% a year, which is the central bank’s target.
Prices in May were up just 1% from a year earlier, according to an inflation measure the Fed is watching closely.
“The resurgence of hospitalizations and deaths due to COVID-19 is affecting growth. Consumer spending has, at best, stagnated. Employment may have contracted in recent weeks,” he says.
If the Fed provides a clearer picture of how long it will keep interest rates low, that is one way the meeting could bring down mortgage rates this week. But there are others.
Why Mortgage Rates Could Dive Further?
Fed officials do not directly control mortgage rates, but their actions and statements have a strong influence. Earlier this month, 30-year fixed-rate mortgages fell to an impressive minimum of 2.98%, on average, according to mortgage company Freddie Mac.
The Fed has created a climate for those ultra-low mortgages not only with its near-zero interest rates, but also with its other tactics to shore up the economy. You have been buying Treasuries and mortgage-backed securities, which are mortgage loans grouped into bond-like investments.
Central bank policymakers are expected this week to indicate that they plan to keep those purchases, which have helped to cut mortgage rates and should keep them down.
If the policy panel offers a grim description of what COVID-19 is doing to the economy, investors could seek security for their money by hoarding Treasuries. Demand would drive bond prices up, bond interest would accrue, and so would mortgage rates, which often move in sync with bond yields.
We have seen this scenario play many times before. Mortgage rates have slipped repeatedly this year after dire warnings about the economy and Fed President Powell’s coronavirus, in appearances before Congress and on television.
Borrowers can already find 30-year mortgage rates as low as 2.5%, but you have to shop around to find them. Always look up rate quotes from various lenders and compare them diligently, because some lenders are quicker to adopt lower rates than others.
Use the same strategy when buying or renewing your home insurance. Go online and compare your policy to make sure you get the right coverage at the best price.
