What the Fed's Surprise Interest Rate Cut Means for Mortgage Rates
By: MarketWatch.com
Published: March 3, 2020
The Federal Reserve just cut its benchmark interest rate.
The Fed made the rare move to lower the federal funds rate by a half-point to a range of 1% to 1.25% in between its regularly scheduled meetings. The central bank noted that the move was in response to the “evolving risks” the COVID-19 coronavirus outbreak poses to the economy.
The novel coronavirus first emerged around Wuhan, China, late last year. As of Tuesday, there were 91,313 cases and 3,118 deaths worldwide. At least 105 people had contracted the virus in the U.S. as of Tuesday.
Mortgage rates have plummeted since the beginning of the year to the lowest average since 2016 as a result of market movements in response to the coronavirus. While the Federal Reserve adjusts short-term interest rates, mortgage rates fluctuate based on long-term bond rates.
In particular, mortgage rates in the U.S. roughly track the direction of the yield on the 10-year Treasury note TMUBMUSD10Y, -3.01%. The 10-year Treasury had fallen to all-time lows in recent weeks as investors fled to the safety of bond markets amid the downturn in equity markets. To that extent, the Fed was responding to the bond market’s recent movements with its decision to cut rates Tuesday, economists said.
“We’ll probably see the 10-year Treasury move lower ahead of any other future Fed moves,” said Tendayi Kapfidze, chief economist at LendingTree “Those in the refinance market would be smart to lock in rates now.”
Continued downward movement in the 10-year Treasury would normally signal downward movement in mortgage rates. Where they stand now, Treasury yields suggest that mortgage rates still have some room to move lower, said Rick Sharga, a mortgage industry veteran and president and CEO of CJ Patrick Company, a financial-services consulting firm. “I wouldn’t be surprised to see 30-year loans with 3.0% rates before things settle back down,” Sharga said.
Current low rates have already caused a boom in refinance activity. And demand among home-buyers remains elevated, in spite of the short supply of homes for sale. As a result, lenders don’t need to give Americans much more incentive to apply for new home loans.
One exception to the mortgage rates trend could be home equity lines of credit, or HELOCs. These are adjustable-rate loans based on the prime rate. As such, they are set to see a drop in interest rates, since the prime rate does closely follow the Fed’s benchmark federal funds rate.
“HELOCs have been slowly falling in popularity, and over time the amount of HELOC debt has been gradually falling as people pay down their debts and fewer people take up the slack by borrowing them,” Lewis said. “This seems time for that trend to possibly reverse. The rates on HELOCs are going to be so tempting, especially for people who want to fix up their homes.”
Learn more about how you can take advantage of these historically mortgage rates.
Full Article: https://www.marketwatch.com/story/heres-what-the-feds-surprise-interest-rate-cut-means-for-mortgage-rates-2020-03-03