federal reserve

8 ways the Federal Reserve's interest rate decisions affect your life

Turning the key on mortgage rates
Turning the key on mortgage rates © iStock

Turning the key on mortgage rates

When the Fed lowers the federal funds rate, lenders can finance home loans more cheaply. As a result, they can reduce the interest rates they charge for a fixed-rate mortgage.

In recent years, the Fed has kept the federal funds rate low in an attempt to stimulate the housing market.

"The Fed is making homes affordable at all-time levels with low interest rates on mortgages," Mervine says. "A lot of people are underwater, but if they can save and pay down their prior mortgage, they can refinance at extremely low rates."

The Fed can even control the shape of the yield curve, or the relation between interest charged for 1-year loans, 3-year loans, 5-year loans and so on. "If they want to bring down 10-year rates, they'll go out and buy 10-year securities," says Oghoorian.

Mortgages are pegged to the 10-year Treasury rate, because refinancings and early payoffs effectively give a 30-year mortgage a 10-year lifespan, Oghoorian says. Competition and market conditions also affect rates.

advertisement

Show Bankrate's community sharing policy
          Connect with us
advertisement
advertisement

Blog

Mitch Strohm

Mortgage rates for Tuesday, May 3

Mortgage rates mostly fell today. Borrowers with excellent credit typically get a better-than-average rate.  ... Read more

advertisement

Connect with us