An interesting thing just happened. At first glance, it almost doesn’t seem to make sense. The Federal Reserve raised its key interest rate Wednesday, yet mortgage rates went down faster than they have all year. How is this possible?

Explaining the Federal Key Rate

On March 15, the Federal Reserve announced that the key interest rate was going up by 0.25 percentage points. This represents the third time it has been raised since the financial crisis began in 2008. This interest rate is a very influential component of the U.S. economy. On paper, a higher federal rate means the more expensive it is to borrow money. However, it applies only to very creditworthy institutions and relates directly to extremely short-term (overnight) loans. The announced rate hike means short-term interest rates will go up to a range between 0.75 percent and 1 percent.

At the same time, a hike in the federal key interest rate typically means that there is increased confidence in the growth of the U.S. economy. The key rate was dropped to 0 percent in December 2008 to help the housing market survive. Since then, the economy has steadily improved and each rate increase has represented a step forward toward normalcy.

How Mortgage Rates Were Affected

With the key rate going up, it may appear odd that mortgage rates went down at such a quick pace. The reason for this is that financial markets were already well-prepared for the Fed’s key rate increase (as well as an anticipated faster pace for future rate increases). This outlook and planning allowed for mortgage lenders to bring rates down 0.125% on average on Wednesday, leading to 4.25% rates for top-tier qualified borrowers on 30-year fixed mortgage loans.

Best-execution rates for FHA and VA loans range from 4.0-4.25%, while 15-year fixed mortgages range from 3.5-3.625%. Five-year ARMs are in the 2.75-3.25% range, depending on the lender.

What Does This Mean for You?

The question now is how long these low rates will last before the rising federal rate drives mortgage rates up again. When will this latest bubble burst? If you are on the fence about buying a home or refinancing your mortgage loan, it’s a good time to talk to a mortgage expert and understand your options. It may be the right time to make your move.

For more information about the Federal Reserve key rate and current mortgage interest rates, or to begin your mortgage pre-approval, home refinancing or equity cash-out process, contact Transparent Mortgage today at (619) 929-0199.

 

Beau Hodson

Beau Hodson

About the Author Since 2003, Beau has been a mortgage professional and is a leading mortgage broker and lender in San Diego. As Founder and Senior Mortgage Advisor at Transparent Mortgage, he is truly committed to serving the needs of his clients and raising industry standards for integrity and transparency.