Mortgage Rates : How To Handle Your Mortgage Rate Ahead Of This Week’s Federal Reserve Meeting
U.S. mortgage rates appear to have peaked.
After a summer spell during which the 30-year fixed rate mortgage rate rose more than 1 percentage point nationwide, mortgage rates face some headwinds and may move lower through the end of 2013 and into 2014.
The near-term mortgage rate outlook may be sealed as soon as this Wednesday as the Federal Open Market Committee (FOMC) adjourns from a pivotal two-day meeting which has Wall Street players on edge.
Mortgage rates may drop sharply Wednesday afternoon. Or, of course, they may surge.
Mortgage Rates Subject To Federal Reserve Decisions
The Federal Reserve is the U.S. central banker. It meets eight times annually to set our nation's monetary policy. Among the tools at the Fed's disposal is the Fed Funds Rate.
The Fed Funds Rate is the prescribed interest rate at which banks borrow money from each other overnight. When the Fed Funds Rate is low, banks pay less interest annually which frees capital for investment in business and consumers.
Conversely, when the Fed Funds Rate is high, banks pay higher levels of interest and have less capital available to invest.
Since December 2008, the Fed Funds Rate has been in a range near zero percent. It's one way by which the Federal Reserve has attempted to stimulate to the U.S. economy into measurable, sustained growth.
Another method that the Fed has used is a mortgage bond purchase program known as quantitative easing (QE). Via QE, the Federal Reserve buy mortgage bonds on the open market which influences the mortgage-backed securities.
Mortgage bonds are the basis for U.S. mortgage rates. When demand is high and prices rise, mortgage rates drop. Low mortgage rates stimulate refinances, catalyze job growth and may spur new home sales.
Since 2008, the Fed has embarked on three rounds of quantitative easing.
The third, most recent round of quantitative easing is commonly called QE3. QE3 launched in September 2012 and has been the Federal Reserve's largest QE3 program to-date. Shortly after QE3 went into effect, U.S. mortgage rates dropped to their lowest levels in recorded history.
QE3 won't last forever, though -- something of which the Fed reminded the markets on May 1 of this year.
In its post-FOMC meeting statement, the Federal Reserve said that, going forward, the purchases via QE3 may "increase or reduce" based on the health of the U.S. jobs market; and, based on inflationary pressures on the U.S. economy.
Wall Street panicked on the update, which ignited the worst 8-week run in mortgage rates since 1981's inflation-fueled bond runs. Mortgage rates rose more than 1 percentage point and home purchasing power sank.
The Fed will its next QE3 announcement this week.
FOMC : A Reason To Expect A Mortgage Rate Reversal
For U.S. home buyers and refinancing households, Wednesday bring a large amount of event risk. The Federal Reserve will adjourn from a two-day meeting with a QE3 announcement expected, and that will move mortgage rates.
The Fed won't end QE3 this week. It is, however, expected to offer guidance about when the program start to "taper". The Fed has repeatedly said that the future of QE3 is data-dependent. A strong economic outlook could hasten the Fed's timeline whereas a weak one could leave stimulus in play for longer than Wall Street planned.
The longer that QE3 lasts, the lower that mortgage rates will be for U.S. home buyers and refinancing households. QE3 is linked to low rates for all government-backed loan programs including those from the FHA, the VA, the USDA and from Fannie Mae and Freddie Mae.
The Federal Reserve releases its post-meeting statement at 2:00 PM ET Wednesday. Mortgage rates will be volatile through the end of Wednesday afternoon. Rates may rise or rates may fall -- it's unknown what the Fed will say or do.
Make Your Hedge Against Rising Mortgage Rates
Mortgage rates are at a crossroads. When there was talk that QE3 would end, rates climbed to the mid-4s and they've stayed in a tight range since. The future of QE3 will determine whether mortgage rates break for 5 percent, or slip back down to the 3s. Either outcome is a possibility.
Mortgage rates may drop on Wednesday. Then again, maybe they won't. Don't leave your mortgage rate to chance. If you're currently shopping for rates, consider locking something down. Today's rates look great.