Interest rates aren’t changing anytime soon

Federal Reserve Building in Washington DC
Orhan Cam / Shutterstock
The Federal Reserve building in Washington, D.C.

The Fed’s benchmark interest rate — known as the federal funds rate — has been hovering around zero since March, when officials slashed it in response to the economic effects of the pandemic.

With cases of COVID-19 spiking across the U.S., the central bank has pledged not to increase the federal funds rate until the economy reaches maximum employment and inflation increases to over 2%.

The Fed also has committed to increasing its holdings of Treasury and mortgage-backed securities over the coming months, which it says will “sustain smooth market functioning” and “[support] the flow of credit to households and businesses.”

This strategy should “help keep longer term rates, including mortgage rates, low,” says Danielle Hale, chief economist for Realtor.com.

"The economy is still healing and may be doing so at a slower pace," says Hale. "The Fed has done its part to reassure skittish investors that it is alert and will continue to support the economy as needed."

What this means for your mortgage

Modern style suburban home
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The Fed has created a climate for seriously low rates on home loans.

The Fed’s ultra-low benchmark interest rate has a direct impact on the prime rate and related borrowing costs, like credit card APRs, rates on adjustable-rate mortgages, and home equity lines of credit.

And although the federal funds rate isn’t tied closely to fixed mortgage rates, the low-interest environment created by the Fed’s COVID response has caused rates on 30-year fixed-rate mortgages to plunge lower than ever.

This week, the average for 30-year fixed-rate loans has dropped to 2.78%, according to mortgage company Freddie Mac. It’s the 12th time this year that rates have set a new record low; Freddie Mac began tracking mortgage rates almost five decades ago.

As a result of bargain mortgage rates, home sales are soaring.

However, huge numbers of Americans are missing out on the chance to refinance their current mortgages. The data firm Black Knight this week estimated that 18.5 million homeowners could save an average $304 per month by refinancing into one of today’s bargain rates.

Could rates still rise?

A positive housing market concept and graph
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Although interest rates are projected to stay low for years to come, a new 0.5% fee on refi loans could cut into your savings if you wait much longer to refinance.

The fee officially comes into effect on Dec. 1, although some lenders have already started building it into their pricing.

To find the best rate on a new mortgage or a refinance, it’s wise to compare offers from multiple lenders — because there can be big differences from one lender to the next.

You can use the same approach with your homeowners insurance: Shop around and get quotes from several different companies to make sure you’re getting the best price.

Here are some of the best mortgage rates in your area right now:

About the Author

Shane Murphy

Shane Murphy

Reporter

Shane is a reporter for MoneyWise. He holds a bachelor’s degree in English Language & Literature from Western University and is a graduate of the Algonquin College Scriptwriting program.

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