What is the FED Funds Rate and How Does it Affect My Client’s Mortgage Interest Rate?

What is the FED Funds Rate and How Does it Affect My Client's Mortgage Interest Rate?
What is the FED Funds Rate and How Does it Affect My Client's Mortgage Interest Rate?

Hi! Tom Heath with the Heath Team at Nova Home Loans. This is our weekly installment of Mortgage and Real Estate Related Matters. And today I wanted to talk to you about the term, the FED Funds Rate. It’s a little confusing for consumers to understand. It’s confusing for all of us, probably, to understand.

The Federal Reserve meets regularly and in those meetings they announce that they are going to raise lower or keep interest rates the same, and then they make projections as far as what they think will happen in the future. The interest rate to which they’re referring, the FED Funds Rate, is not mortgage interest rates. The FED Funds Rate is what banks can borrow money at that rate for overnight to make sure that they have enough reserves on their books to meet their federally mandated requirements.

As part of the stress test on banks, they have to have a certain amount of reserves available at all times. If at the end of business, they have lent too much money. And they are short on their reserves, they can borrow money from other banks or the Federal Reserve at the FED Funds Rate. It’s an overnight loan until the next business day.

Now that does mean if banks can borrow money at lower interest rates that they’re probably going to lend them out at lower interest rates, but that really applies to things that the bank’s control like credit cards, and car loans. Mortgages and mortgage interest rates are really driven by investor demand for an instrument called him mortgaged back security (MBS). The higher the demand by investors for the mortgage-backed security, the lower the rate and vice versa. If investors aren’t purchasing mortgage-backed Securities, interest rates will rise on mortgages.

So the FED funds rate does not change the mortgage interest a consumer will pay on a new loan. It may impact the market which could impact investors decisions, but the the mortgage interest rate that they’re paying is going to be for the specific demand on that day for investors at the time, the borrower’s are locking in their interest rate.

It’s a complex topic. We can certainly break it down with a little bit more thorough video and if you want insight, we also have a lot of stuff on our website: TheHeathTeam.com if you want to share this with your consumers let us let us know. We can create a more consumer-friendly version of this, might be a little bit longer, but today just really wanted to get across that the FED Funds Rate is not mortgage interest rates. Hope you have a great weekend tune in next Monday for another episode. Thank you!

0 0 votes
Article Rating
Notify of
Inline Feedbacks
View all comments