The Federal Reserve took steps in March to keep money flowing through the mortgage financing system. The actions, including two rate cuts, were part of the central bank’s broader efforts to protect the economy from more damage from the COVID-19 pandemic.
Rates on fixed-rate mortgages and home equity lines of credit have fallen since the Fed pledged to buy billions of dollars’ worth of mortgage-backed securities and cut short-term rates. But fewer homes are being put on the market and mortgage applications are down, heralding a decline in home sales.
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 the year, on March 3. 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 rate reductions were designed to stimulate the economy when the worst of the pandemic passes and people get back to work and get full paychecks again. The Fed announced after its next meeting, April 28 and 29, 2020, that it would keep the federal funds rate near zero “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”
The impact on mortgage rates
The Fed also announced in March that it would buy as many mortgage-backed securities as needed “to support smooth market functioning.” This tactic, known as quantitative easing, is designed to keep money flowing through the financial system.
The purchases of mortgage-backed securities are to make sure lenders have money available for home buyers and refinancers to borrow. Fixed mortgage rates fell a little less than half a percentage point from mid-March to mid-April. The Fed announced in April that it would continue its quantitative easing program.
Home sellers and buyers responded to COVID-19 by pulling back. The Mortgage Bankers Association reported declines in mortgage applications in mid-March and early April.
The Fed’s March 3 and March 15 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. Initial rates on 5/1 ARMs have not changed much in NerdWallet’s rate survey, but ARMs will likely see lower rates at their next reset period. HELOC rates are averaging about 1.25 percentage points lower in mid-April than in mid-February.
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 just a few weeks ago. New listings declined 15% at the end of March — at the time of year when listings typically rise, according to Black Knight, a real estate data company.
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.