For starters, what is the Federal Fund Rate? It is something that is talked about all throughout the year but not everyone actually understands what it is. The Fed Fund Rate is the rate at which banks and other institutions lend money to each other. This is usually on an overnight basis. Banks are required to keep an amount of their customer’s money on reserve. The reserve money is money that the banks cannot earn any interest on.
The Federal Reserve ended it zero-interest rate policy in December 2015, raising rates by 25 basis points (0.25%) for the first time in more than a decade. However, the Fed move did not lead to an increase in consumer mortgage rates. On the contrary, mortgage rates dropped more than 50 basis points (0.50%) after the Fed’s late-2015 move.
This is because the U.S. mortgage rates aren’t set or established by the Federal Reserve or any of its members. Rather, mortgage rates are determined by the price of mortgage-backed securities (MBS), a security sold via Wall Street.
The Federal Reserve can affect today’s mortgage rates, but it cannot set them.
Call us today to see how the Fed Funds Rate could affect your mortgage interest rate!