Does a Fed Rate Hike Affect Mortgage Rates? What Home Buyers Need to Know

If you're thinking about buying or selling a home, you've probably seen the headline:

“The Federal Reserve raised interest rates.”

And almost immediately, another question follows:

“Does that mean mortgage rates are going up?”

The short answer is: not necessarily.

One of the most common misconceptions about interest rates and real estate is that a Federal Reserve rate increase automatically causes mortgage rates to increase. The relationship between the Federal Funds Rate and mortgage rates is much more complicated.

If you're buying or selling a home in Northeast Iowa or Southwest Wisconsin, here's what you should know before making a decision based on the latest interest-rate headline.

Does a Fed Rate Hike Automatically Increase Mortgage Rates?

No.

The Federal Reserve does not directly set the interest rate for a typical 30-year fixed-rate mortgage.

The Federal Funds Rate is the rate banks charge one another for overnight borrowing. Changes to this rate can influence other interest rates throughout the economy, but mortgage rates are affected by a broader set of economic and financial market conditions.

This is an important distinction for home buyers.

Fed rates and mortgage rates are connected, but they do not move together automatically.

What Is the Direct Impact of the Federal Funds Rate on Home Loans?

One of the more direct impacts on home lending can be seen with Home Equity Lines of Credit, or HELOCs.

HELOCs commonly have variable interest rates that are tied to the Prime Rate. Because the Prime Rate generally moves with changes in the Federal Funds Rate, a Federal Reserve rate hike or cut can have a more immediate impact on these types of loans.

A traditional fixed rate mortgage works differently.

What Actually Determines Mortgage Rates?

Mortgage rates are influenced by several factors, including:

• Inflation

• Employment and wage growth

• Economic growth

• Treasury yields

• Mortgage-backed securities

• Investor demand

• Expectations about future Federal Reserve policy

• Overall economic conditions

  
  

This is why mortgage rates can move even when the Federal Reserve hasn't changed the Federal Funds Rate.

Mortgage markets are constantly looking ahead.

Investors are making decisions based not only on what the Federal Reserve is doing today, but also what they believe the Fed will do in the months ahead.

Can Mortgage Rates Go Down After the Fed Raises Rates?

Yes.

This is one of the reasons the relationship between Federal Reserve decisions and mortgage rates can be confusing.

If the financial markets have already anticipated a Federal Reserve rate increase, that increase may already be reflected in mortgage rates before the announcement is made.

As a result, the actual announcement may cause very little movement.

In some circumstances, mortgage rates can even decline following a Fed rate hike if the Fed's accompanying statements lead investors to believe that future rate increases may be less aggressive than previously expected.

The opposite can also happen.

A Federal Reserve rate cut does not automatically mean mortgage rates will immediately fall.

Think of it this way:

Fed rate increase ≠ automatic mortgage rate increase

Fed rate decrease ≠ automatic mortgage rate decrease

The mortgage market is influenced by expectations, economic data and financial markets in addition to Federal Reserve decisions.

What Does This Mean for Home Buyers?

If you're currently looking for a home, don't make a major decision simply because you saw a headline about the Federal Reserve.

Instead, talk with your mortgage lender.

Your lender can help you understand:

• Current mortgage rates

• Your estimated monthly payment

• Different loan options

• Whether you should consider locking your rate

• How a change in rates could affect your purchasing power

  
  

If you haven't locked your mortgage rate yet, it's especially important to stay in communication with your lender.

Mortgage rates can change independently of a Federal Reserve announcement, and your lender can provide information based on your specific loan and financial situation.

What Does This Mean for Home Sellers?

Interest rates can have an impact on the real estate market because they affect how much a buyer can afford to borrow.

When mortgage rates are higher, some buyers may have less purchasing power. That can affect the number of homes they consider, the price they are comfortable paying and how quickly they make a purchase.

However, interest rates are only one piece of the real estate market.

Local inventory, home prices, employment, buyer demand and the condition and location of a property also play important roles.

That's why national headlines don't always tell you what's happening in your local real estate market.

Should You Buy or Sell Because of Interest Rates?

There isn't a one-size-fits-all answer.

For buyers, waiting for mortgage rates to change can have other consequences. Home prices, inventory and competition can also change while you're waiting.

For sellers, pricing a property appropriately and understanding current buyer demand can be just as important as watching interest rates.

The best approach is to look at the entire real estate picture, rather than making a decision based on one Federal Reserve announcement.

The Bottom Line on Fed Rate Hikes and Mortgage Rates

If you remember one thing from this article, remember this:

A Federal Reserve rate hike does not automatically mean mortgage rates will increase.

The Federal Funds Rate and mortgage rates are related, but they are not the same thing. Mortgage rates respond to a much larger combination of economic conditions, financial markets and investor expectations.

So before you panic over the latest interest-rate headline, take a breath.

Talk to your lender. Look at the numbers. Understand your options. Then make the decision that makes sense for your situation.

And if you're considering buying or selling real estate in Northeast Iowa or Southwest Wisconsin, understanding the local market is just as important as understanding the national headlines.

At Riverstone Real Estate Services, we believe in giving our clients the information they need to make informed real estate decisions — without the hype and without the games.

Thinking about buying or selling? Let's talk about what's actually happening in your local market.