Why mortgage rates are likely to hover near historic lows for years

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In their latest meeting, Federal Reserve policymakers said they would continue to aggressively purchase government and mortgage-backed bonds while keeping interest rates near zero through 2022.

The Fed’s massive bond buying program contributes to lower Treasury yields and lower mortgage rates, says Dick Lepre, senior loan officer for RPM Mortgage, Inc., in San Francisco.

The last time the Fed fell back on such a policy to stimulate the economy was during the 2008 financial crisis. During that six-year period, mortgage rates dipped to record low levels.

This kind of monetary policy is one of the ways in which the Fed can influence mortgage rates.

But it’s important to note that the Fed does not have the ability to directly set mortgage rates. The other half of the Fed’s recent announcement, to keep the federal funds rate at 0 percent, doesn’t directly impact what happens to the rate you receive.

“What the Fed sets is the overnight rate,” explains Lepre. Otherwise known as the federal funds rate, it’s the rate banks and other financial institutions pay in interest to lend money to each other.

Mortgage rates tend to track in harmony with the rate on the 10-year Treasury. So, while the Fed doesn’t influence yields on the 10-year Treasury, cutting the federal funds rate can sometimes push investors towards the safety of 10-year Treasuries, pushing down yields on both Treasuries and mortgage rates.

Other factors that influence mortgage rates, besides the Fed’s bond buying policy, include supply and demand in the market and price inflation.

In short, all of this means homeowners likely have more time (potentially years) to lock in a historically low mortgage rate.

Getting the lowest mortgage rates

Though mortgage rates are historically low, the best rates are inaccessible to a large portion of the population.

A recent report from the Urban Institute concludes that borrowers with credit scores of 720 or above are locking in mortgage rates 78 basis points lower than borrowers with credit scores of 660 or below. A basis point is one one-hundredth of 1 percent, so the person with the higher credit score might get a mortgage rate of 3 percent, while the lower credit score borrower would get a rate of 3.78 percent.

Plus, the availability of credit is tightening, according to a report from the Mortgage Bankers Association.

The upside is that due to the Fed’s policy, mortgage rates are forecast to remain low for quite some time, giving borrowers with poor credit the opportunity to improve their credit score and lock in a low rate.

Look beyond the low mortgage rate

Finding a mortgage with a low APR can save you thousands over the life of the loan. But Lepre advises prospective borrowers to find a lender they can trust as well.

“The most important thing for people who are shopping for rates is to make sure they’re getting the quote from someone who is trusted – someone they’ve done with business with before, or that their friends, parents, relatives or coworkers have done business with,” he says.

Lenders you have a relationship with might work to get you a better deal that you might get otherwise.

Featured image by David McNew / Getty Images.

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