What the Fed rate cut means for mortgage rates

In its second emergency response to the COVID-19 pandemic, the. U.S. Federal Reserve (Fed) slashed interest rates — this time by a whole percentage point, bringing its benchmark rate to effectively zero. The Fed also committed to buying $500 billion in Treasury bills and $200 billion of mortgage-backed securities in an additional attempt to stimulate and protect the economy.

You may be wondering: What does this mean for mortgage rates? To put it simply, the fed funds rate does not directly dictate mortgage rates. That means a 0% fed funds rate does not equal 0% mortgage rates, nor does it mean mortgage rates will immediately drop as a result.

Mortgage rates are influenced by a number of factors. In general, the 10-year Treasury yield has been the most likely indicator of where mortgage rates are headed. (The one exception is HELOC rates, which are tied to the U.S. prime rate, and therefore, the fed funds rate.) If investors shift to buying safer assets such as the 10-year Treasury note, we may see mortgage rates drop in the coming weeks.

Bottom line: No one can predict whether rates will rise or fall. But what we do know is that mortgage rates are still at historic lows. If you’re watching the market and are considering locking in a rate for a purchase or refinance, now may be the right time to act.

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