Your Guide To The Federal Reserve & Mortgages
10/30/2019 Jerrica Farland
UPDATE — Federal Reserve cuts rates by another 0.25%*
In the October 30th meeting, the Federal Reserve cut interest rates for the third time in 2019 — reducing the benchmark short-term interest rate by 0.25% once again. But what does this mean for you and your monthly mortgage payment? Let’s find out.
Why is the Federal Reserve lowering interest rates?
The Federal Reserve System (The Fed) is the United States’ central bank, which regulates financial institutions. The Federal Reserve decreased the benchmark interest rate (the base rate financial institutions use when lending) to encourage borrowing and lending among banks, businesses and consumers.
The Fed’s rate changes have a broad impact on the economy, which eventually leads to a general decrease or increase in interest rates over time, particularly for new credit.
Should I refinance now?
When the federal lending rate decreases, your monthly payment could temporarily decrease if you have a HELOC, ARM, or another variable-rate loan. But when rates start climbing again, your payments could also increase.
If you have a fixed-rate mortgage, your rate stays the same for the life of your loan, whether 15 years or 30.
Whether you have a fixed-rate or variable mortgage in the mix right now, it’s important to understand that 30-year fixed mortgage rates are at historic lows. Consider refinancing if:
- Current interest rates are at least 0.5% lower than your current fixed rate.
- You have a variable or adjustable-rate mortgage, you’re planning on staying in your house for several years, and you’d like to lock in a lower-interest fixed-rate loan.
- You’d like to shorten the life of your loan — for example, moving from a 30-year fixed mortgage into a 15-year fixed rate mortgage.
- Your home value has risen, and current, low interest rates could help you draw responsibly on equity with cash-out refinancing.
- Your refinanced interest rate is much lower than your interest rate on credit cards or other debt. Cash-out refinancing can be used to pay off multiple debts, as part of a balanced financial plan.
How do falling interest rates impact my monthly mortgage payment?
Lower mortgage interest rates make owning a home less expensive by reducing your monthly payment, composed of principal, interest, taxes and insurance. You’ll also save money over the life of your loan.*
For example, if you have a 30-year loan with 6% interest for a $100,000 house, you’ll pay around $600 a month in interest. If refinancing lowers your rate to 4%, you would pay $477 in interest monthly — that’s an extra $123 in your pocket every month (or $1,476/year), that could go toward other things you want to spend your hard-earned cash on.**
Rates also influence how much house you can buy. Decreasing interest rates can make expensive homes more affordable. The inverse is true, too — what you could afford at a 3% interest rate may become impossible at 6%. Recent news reports have pointed to a buyer’s market in many locations.
How high or low can mortgage interest rates go?
30-year fixed mortgage rates went as low as 3.35% in 2012, when the U.S. economy was struggling to recover from The Great Recession. Rates went as high as 18.45% in 1981, when the national average cost of a house was just $82,000.***
With interest rates at historic lows, it might be time to start thinking about selling, buying, refinancing, or otherwise taking advantage of these low rates. To learn more about your options, get started online now, or get in touch with a PennyMac Loan Officer to learn more.
*By refinancing your existing loan, your total finance charges may be higher over the life of the loan.
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