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The Federal Reserve has taken several steps to protect the economy from more damage from the COVID-19 pandemic. The result has been lower interest rates on mortgages and home equity lines of credit.
Here’s what this means for home buyers, homeowners considering a refinance, people with adjustable-rate mortgages and anyone who wants to know whether they should lock a rate.
Why the Fed cut interest rates
Mortgage rates started falling weeks before the Fed’s first emergency rate cut of last year, on March 3, 2020. Then, 12 days after that reduction of half a percentage point, the Fed announced another surprise rate cut of a full percentage point — setting a target federal funds rate to a range of 0% to 0.25%.
The federal funds rate has remained near zero since then, and the central bank says it won't raise the rate until maximum employment is achieved and inflation is on track to "moderately exceed 2 percent for some time." It reiterated this policy at its most recent meeting, which ended Sept. 22, 2021.
The impact on mortgage rates
The Fed began buying billions of dollars' worth of mortgage-backed securities, injecting money into the mortgage financing system and resulting in a drop in mortgage rates that has persisted.
Home sellers and buyers responded to COVID-19 by pulling back in the spring, as home resales slowed. But sales began to recover in summer.
The Fed’s March 2020 rate cuts were good news for those with or shopping for adjustable-rate mortgages and home equity lines of credit, which are guided by Fed rate movements. HELOC rates fell about a percentage point from where they stood in mid-February 2020.
What to know if you’re:
Buying a home
If you’re in the market to buy a home, you have fewer homes to choose from than you had a year before. The number of homes for sale has gone down as would-be sellers have kept their homes off the market.
There’s only so much that lower mortgage rates can do to stimulate home sales while fewer homes are on the market. Mortgage rates and affordability aren’t the biggest challenges in today’s housing market. A lack of affordable homes for sale is.
Here are two tactics that make you more likely to prevail:
Get a mortgage preapproval. A preapproval letter gives sellers confidence that you’ll be able to get a loan and that the sale will go through.
Let the seller know that you can be flexible about the closing date if that’s possible.
» MORE: How much house can you afford?
Plenty of homeowners are refinancing now. Lenders are enduring heavy workloads. You can do your part to lighten the load by submitting a complete application, with all the necessary documentation. Online applications usually will let you know if you haven’t provided all the necessary documents.
Know why you’re refinancing so you can get the right loan. It might be to get a lower monthly payment, to shorten the loan term, replace your adjustable-rate mortgage with a low fixed-rate loan, to borrow more than you owe in a cash-out refinance or to get rid of FHA mortgage insurance.
Shop more than one lender. You’re more likely to land the best possible deal if you apply with multiple lenders. Each lender will give you a disclosure document called a Loan Estimate. By comparing Loan Estimates, you’ll be able to identify the best offer.
Listen to your loan officer's advice about locking your rate. In normal times, you can lock in a rate when you apply. But with the market in turmoil, some lenders won't let you lock until later in the underwriting process.
Be careful of getting a cash-out refinance, which could reduce your equity at a time when you might want to keep that equity as a cushion in case of unemployment.