Mortgages and refinance loans require major financial decisions by homeowners and home buyers; and mortgage companies emphasize low mortgage rates as a way to gain consumers' attention. Monetary policy decisions made by the Federal Reserve indirectly influence mortgage and refinance rates. The Federal Reserve Bank of Chicago says that the Fed's dual mandate of achieving maximum employment and stable pricing (inflation) along with moderate long-term interest rates drives monetary decisions made by the Federal Open Market Committee of the Federal Reserve (FOMC).
Federal Funds Rate and Refinancing Rates
In the aftermath of the Great Recession, the Fed set its target federal funds rate from 0.00 to 0.25 percent; earlier this year, FOMC members voted to raise the target federal funds rate from 0.25 to 0.50 percent. In general, mortgage and refinancing rates rise or fall with the target federal funds rate. Economic factors considered by FOMC members include:
- Inflation and employment readings as they relate to the Federal Reserve's dual mandate: The goals defined in the dual mandate are benchmarks for economic stability. In recent months, national unemployment fell below the Fed's benchmark, but inflation is lower than the Fed benchmark of two percent. As a result, the Fed is not expected to raise the target federal funds rate until the inflation rate rises to two percent. FOMC statements repeatedly state that monetary policy decisions are subject to current developments in addition to the dual mandate.
- Global and domestic news: FOMC members consider current news and political and economic developments when determining how to steer U.S. monetary policy; post-meeting FOMC statements typically cite positive or negative economic trends as viewed by FOMC members. When the economy contracts, investors typically sell off stocks and buy bonds, which causes mortgage rates to fall. Mortgage rates rise as economic conditions improve and investors sell off bonds and buy stocks. Global economic events can cause drastic shifts in financial markets; the recent decision by Great Britain to exit the European Union caused markets to move wildly.
- Analyst and media response to FOMC statements: FOMC issues a statement at the conclusion of each meeting; the FOMC chair gives press conferences after select FOMC statements. How media and economic analysts interpret information provided by the Fed can affect mortgage and refinance rates according to how financial markets react.
More than Rates: Refinancing When You're Ready
Understanding how Fed decisions and other economic influences impact home loan rates is useful but for the volatility of financial markets and rate changes. Following economic trends and news can help with your decisions about refinancing your mortgage, but there are no guarantees unless you can lock in a specific mortgage rate for a specific period. Locking in a rate can incur additional lender fees such as discount points. Check with your lender about extra costs before locking in your refinancing rate.
Your reasons for refinancing can also impact the rate you'll pay. If you've contracted for a major home improvement project, you'll want to complete refinancing in time to meet your contractor's payment requirements. If you're sitting on a stack of credit card bills, it can be worthwhile to consolidate debt with cash-out refinancing. Past due medical and tax bills carry consequences such as judgments and liens against your bank accounts and even your home. If you're dealing with medical or tax debt, it's best to address them as quickly as possible.
Your decision to refinance can be based on your financial circumstances and goals in addition to what the Federal Reserve is doing.