Last week the Fed had a planned interest rate increase of .25%, yet as of today we are seeing the LOWEST mortgage rates since October of last year. Wait…. What?

Most of us understand that as overall interest rates go up, the cost to borrow money also goes up (think credit cards, car loans, etc). But with mortgages, how interest rates increase or decrease is not always linear with fed “cuts” or “hikes. 

Let’s break that down a little…

Interest rates play a crucial role in determining the cost of borrowing money. We all know that. They directly impact the cost of a mortgage, making them a crucial factor for anyone looking to buy a new home. Understanding the relationship between interest rates and mortgage rates can help buyers make informed decisions about purchasing a home.

When the Federal Reserve increases interest rates, you would expect mortgage rates to also increase. However, sometimes the exact opposite happens, and mortgage rates actually fall! This happens when financial markets expect the economy to slow down and the Federal Reserve to reduce interest rates in the future. In this scenario, bond prices rise and yields fall, leading to lower mortgage rates. This is exactly what we are seeing happen right now. 

Furthermore, the impact of interest rates on mortgage rates affects what buyers can afford when purchasing a new home. A higher interest rate results in a higher mortgage payment, which can reduce the amount of home a buyer can afford (or what we like to call “buying power”). On the other hand, a lower interest rate can increase the amount of home a buyer can afford, making it easier for them to purchase a home that fits their budget.

Of course, this directly relates to HOW MUCH house you are potentially buying (think price). While location, size, upgrades and upkeep play a big factor;  inventory of available houses plays a major role on home pricing. When the inventory of homes is low, competition among buyers can drive up prices, making it more expensive to purchase a home. On the other hand, when the inventory of homes is high, there is less competition among buyers, which can result in lower prices and more affordable homes. This is supply and demand and how they affect cost in a nutshell.

Let's tie it all together now. So while the prices of homes fluctuate based on market inventory, how much home someone can buy (aka make a monthly payment for) also fluctuates based on interest rates. 

In conclusion, understanding the balance of inventory, interest rates and their impact on mortgage rates is critical for anyone looking to buy a new home. You need to stay informed about changes in these areas and working with a licensed loan officer and relator is the best way to do just that. 

Afterall, when moments like this come around with a 3 month dip in mortgage rates, you want to be able to move to catch it.