Mortgage (interest) rates

The housing market received a positive signal from the U.S. central bank today.  The Wall Street Journal reported that the Federal Reserve (also known as the Fed or U.S. central bank) plans to keep interest rates at the current level for the next year or two.  This means mortgage rates will likely remain at historic lows for potential homebuyers for the next year or two.  If people are able to get back to work, this may be the best time to buy a home in at least the last forty years.  That assumes a buyer’s credit is good, and she has a down-payment.  And that may be a lot in today’s society.

Besides being good for homebuyers, low interest rates are good for consumers, making credit card purchases less expensive.  Interest rates on credit cards are typically set use the prime rate.  The prime rate is based on two key rates set by the Fed: the federal funds rate and the discount rate.

About every forty days the Fed meets to set a target for the federal funds rate, which is the interest rate banks charge each other for overnight loans.  When the Fed raises the target on this rate, most other interest rates follow, including mortgage rates.  In other words, if the Fed increases the federal funds rate to 3 percent from 2 percent, mortgage rates, such as that on a 30-year fixed rate loan, may jump one percentage point.

Also, the Wall Street Journal reported the Fed is planning to signal the changes to interest rates ahead of time.  This is in contrast to the past 20 years or so when the Fed kept secret its planned changes until after the policymaking meeting.

This means homeowners and real estate professionals may be able to get an idea of which way rates will be moving two to three months, perhaps even a year, ahead of time.

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About Keith Burbank

Keith earned a master's degree in economics in 1995, and since then has worked as an economist in consulting, journalism, college teaching, and government.

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