Why Mortgage Rates Aren’t Really 0%

Why Mortgage Rates Aren’t Really 0%

Why Mortgage Rates are Different from the Fed Rate

It’s been a wild ride in the housing market this Spring to say the least. In this uncertain environment, many have asked:

“Are mortgage rates really 0%?”

The short answer is no. And here is why.

As we’ve noted in our past newsletters, we were planning on relatively smooth sailing for interest rates in 2020. But, as we all know too well, COVID-19 changed everything.

In response to a plummeting stock market, the Fed issued an emergency rate cut, for the first time since the 2008 crisis. First to .5% and then again to nearly 0%.

The Fed’s drastic move got borrowers thinking – this must mean that mortgage rates are 0%.

However, that’s not what the rate cut means. Unfortunately, when the Fed announced that they cut interest rates on the Fed Funds Rate by 1% to almost 0%, they failed to educate the general public that the Fed Fund Rate is not the same as mortgage rates. Although mortgage rates are influenced by the Fed, it’s Wall Street that controls them.

In fact, according to The Mortgage Reports, “Over the last two decades, the fed funds rate and the average 30-year fixed rate mortgage rate have differed by as much as 5.25%, and by as little as 0.50%.” See the chart below.

We can expect housing to come back very strong and this may be a great opportunity to buy that home you were looking for and benefit from it well into the future.

What We Can All Do

The Fed perhaps overlooked the importance of clearly communicating that Mortgage Rates are not the same as Fed Fund Rates, but as stakeholders in this market, realtors and mortgage lenders can certainly work together to spread the word. Simply assure your homebuyers that the mortgage rates are still favorable for homebuying, but they are not 0%.

We see positive indicators that the housing market will come back strong and we look forward to celebrating those days with you. Contact BOE Boston to help with any additional questions about mortgage rates during this time. In the meantime, we wish you good health and patience.