Understanding the Federal Funding Rate and Its Impact on Mortgage Rates

Hi, I'm Shane Bangle with The Manna Group, and today, I want to help you understand a vital topic: the Federal Funding Rate, also known as the Fed interest rate, and how it connects to mortgage rates. At The Manna Group, we pride ourselves on being educated, knowledgeable, and dedicated to helping you understand current market trends. Right now, one of the main forces affecting the real estate market is interest rates.

The Federal Funding Rate Explained

Interest rates are a big deal when it comes to buying or selling property. To stay on top of this, we at The Manna Group work with expert local lenders who specialize in mortgage lending and can navigate the intricacies of changing interest rates. We aim to have a solid understanding of these factors ourselves, so we can guide you through what they mean for you as a buyer or seller.

Recently, you might have seen headlines about the Fed cutting the funding rate by 50 basis points (or 0.5%). Many real estate agents shared this news with phrases like, "Interest rates are dropping, reach out!" While it’s true that the Fed cut rates, it’s essential to understand that the Federal Funding Rate doesn't directly dictate mortgage rates. Mortgage rates are more closely tied to the 10-year Treasury bond yield rather than the Federal Funding Rate itself.

How Fed Rate Cuts Influence Mortgage Rates

The market usually anticipates moves by the Fed. For instance, in September, mortgage rates started to lower in the weeks leading up to the Fed’s announcement about the rate cut. Many buyers saw rates decrease gradually, with some mortgages dipping below 6%. However, after the Fed's official cut, mortgage rates ticked up slightly—by about an eighth to a quarter of a percentage point. This fluctuation is due to market adjustments rather than direct correlation to the Fed’s cuts.

If the Fed continues to cut rates in the coming months, we might see a gradual decrease in mortgage rates. However, don’t expect them to plummet. It's more likely that we’ll see a steady decline rather than a drastic drop.

Understanding Inflation’s Role

The Fed walks a fine line between promoting growth and controlling inflation. Recently, we’ve had too much money chasing too few goods, causing inflation—an increase in the prices of goods and services. The Fed tries to keep inflation at a manageable 2% level. If inflation rises too quickly, it can affect everything from grocery bills to gas prices, making life more expensive.

To control inflation, the Fed adjusts the cost of borrowing money. By keeping the federal funding rate under control, they hope to maintain balance in the economy. If people rush to borrow and spend too much, the Fed may pull back on rate cuts to prevent inflation from climbing.

What This Means for Homeowners and Buyers

For those who bought homes recently, especially within the last two years when rates were around 6.5% or higher, it might be time to consider refinancing options. Many homeowners could see multiple opportunities to refinance over the next few years as rates continue to adjust. A mortgage refinancing can help reduce monthly payments, and we suggest reaching out to several lenders to explore policies and options.

If you’re curious about how rate changes may affect your mortgage, don’t hesitate to reach out to us. We’d love to talk to you about this process and guide you through your options.

Thank you for joining me today, and I look forward to our next conversation!