The Difference Between Federal Funds Rate and Mortgage Interest Rate

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The Difference Between Federal Funds Rate and
Mortgage Interest Rate
In your preparations to buy a home or an income
property, shopping around for the best mortgage
terms is essential. Do you know how to compare
term sheets and the difference between the
Federal funds rate and your personal mortgage
interest rate? Weve outline the two different
rates and their relationship two each other below
to help you be more knowledgeable and informed
as you prepare to purchase your property. What
is the Federal Funds Rate? Financial institutions
are required to keep a minimum reserve, and to
maintain that reserve they routinely lend and
borrow from each other overnight. When this
transaction takes place, the interest rate is
set and agreed upon by the two financial
institutions. The Federal Reserve does not
directly set the rate at which financial
institutions like banks and credit unions can
borrow from each other. They can, and do, set a
target rate. The average of all the interest
rates between financial institutions is the
Federal funds rate, and the Federal Reserve has
tools at its disposal to raise or lower this rate
by impacting the economy. What is Your Mortgage
Interest Rate? Your mortgage interest rate is the
percentage of the principal that you owe in
interest. Depending upon your amortization
schedule you will pay a different amount of
interest each month. If you have a fixed rate
mortgage, your monthly mortgage payment total
will be consistent, but the amount of interest
and principal in that monthly payment will
vary. How are the Two Related? The mortgage
interest rate you are offered by your lender is
dependent on a list of factors. There are some
factors that are related to your personal
finances, like your income, employment history,
debt-to-income ratio, credit score, and cash
reserves. Other factors are dependent on the
economy as a whole. This is where the Federal
funds rate comes into play. The rate at which
your lender is able to borrow money will impact
your mortgage interest rate. When a financial
institution has to pay more to borrow money to
maintain its reserve, that expense is passed on
to you as the consumer.
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The Bottom Line The ripple effect of a higher
Federal funds rate is higher mortgage interest
rates. Higher expenses for financial
institutions get passed on to you, as the
consumer, in the form of higher mortgage
interest rates. This usually drives housing
prices down, as the cost to borrow
increases. However, experts predict that in 2022
prices in the Bay Area real estate market will
remain high even as we see changes to the Federal
funds rate. As demand for Bay Area housing
remains high, you can anticipate a sellers
market for the rest of the year. Real estate
professionals do not expect to see significant
seasonality in the market this year, as the
majority of homebuyers are millennials looking to
purchase their first home. Demand for affordable
housing will likely increase, even with a higher
Federal funds rate. As you see headlines about
the Federal Reserve raising the Federal funds
rate, you can reasonably expect higher mortgage
interest rates to be in the future. If you are
otherwise prepared to buy a home, this news might
create a sense of urgency to get into the market
at the lowest possible interest rate because even
small fluctuations in interest rate may affect
your budget significantly. With the right team of
professionals, buying a home even with a higher
rate is still possible. For more information
about Bay Area real estate and deciding when to
buy a home, contact me today! Amar Realtor offers
expert real estate services with proven results
in the Cupertino real estate market as well as
outlying areas including homes for sale in
Milpitas, San Jose, Campbell and properties in
San Mateo County, homes in Contra Costa and
Alameda County.