Fed’s Pause on Interest Rate Hikes: Implications on Mortgages

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The Federal Reserve officials announced the decision to keep interest rates unchanged at the Federal Open Market Committee (FOMC) meeting on September 19–20, 2023. This is the second pause after the cycle of 11 consecutive rate hikes since March 2022. 

Currently, the federal fund rates stand within a target range of 5.25 to 5.5 percentage points, marking the highest level in 22 years. These target rates represent the interest rate at which commercial banks and other financial institutions lend excess cash to each other on an overnight basis. 

Adjusting such rates enables the Fed to achieve the conditions required to fulfill its dual mandate. That is, to maintain price stability, maximize employment, and keep long-term interest rates at moderate levels. 

Rate hikes or declines have ripple effects on consumers’ finances. However, how they impact your personal finances depends primarily on whether you’re a lender, borrower, or investor.

This article specifically delves into the implications of the Fed’s decision to maintain interest rates steady on home mortgage loans. But first, let’s examine the reasons for keeping the rates unchanged and what you can expect as a consumer. 

Understanding Fed’s Decision To Keep Interest Rates As-Is

There’s been a strong emphasis on taking a data-driven approach to examining the economic indicators that gauge the 18-month campaign of the Fed’s rate hike. The decision to keep interest rates unchanged allows them to evaluate economic conditions and adjust rates as needed. 

Even though inflation remains well above the Fed’s two percent target, there are signs of it slowing down. The pause may indicate that the labor market is starting to loosen from historically tight conditions. 

But the Fed is wary of stopping rate hikes prematurely and causing increased inflation. At the same time, they don’t want to push the economy into a recession by implementing overly tight monetary policies. A series of hikes can result in extensive layoffs and an economic downturn. 

By keeping interest rates as-is, the Fed’s policymakers can gather more data and assess how much the increased borrowing rates are slowing inflation. They’re becoming more confident they can quash inflation without inflicting significant economic hardship. 

Simultaneously, they are ready to implement rate hikes if appropriate to economic conditions. It’s safe to conclude that the primary objective behind the pause is a soft landing. This means they’re striking a balance between maintaining stability and mitigating sharp economic contractions. 

What the Fed Rate-Hike Pause Means for Your Mortgage

Mortgage rates depend mainly on the 10-year Treasury yield. It’s the benchmark for long-term interest rates, like mortgages. Although the Fed’s rate doesn’t directly affect mortgage rates, they often move in the same direction because of underlying economic factors. 

Individual lenders determine mortgage rates. However, the Fed’s rate can affect various consumer lending products, including mortgage rates. Additionally, some home loans are closely tied to the Fed’s actions, such as adjustable-rate mortgages and home-equity lines of credit. 

Stability is undoubtedly a preferable situation for homebuyers over a rate hike. Still, it only offers little relief amid a challenging housing market. So, while mortgage rates may not rise significantly because of the rate-hike pause, they’re still relatively high. 

Actions Homebuyers Can Take While Interest Rates Are Steady

The rate-hike pause won’t result in lower rates, but it offers some financial flexibility, particularly for homebuyers. 

It’s worth noting that no single action applies to everyone when interest rates shift. The right course of action will vary depending on your specific financial situation and goals. However, homebuyers can take advantage of the steady interest rates by taking the following steps: 

Lock in a mortgage rate today

The steady interest rates are only temporary. Mortgage rates tend to follow the Fed’s rate. Hence, locking in today’s rate can be a smart move if you wish to purchase a home soon. 

That’s because your rate could rise in the upcoming months. Rates dropping at the end of the year remain a possibility. However, it will depend on whether inflation is coming down adequately. 

Based on numerous indicators, increased interest rates are more likely before the end of 2023. Suppose the Fed opts to raise the current benchmark rate again. There’s also a high probability mortgage rates could increase by eight percent

With a rate lock, you can protect yourself from paying a higher rate during closing. If you find more favorable interest rates in the future, refinancing your mortgage can be a viable option to take advantage of long-term savings. 

Purchase mortgage points

Since interest rates are currently stable, purchasing mortgage points can strategically lower your rates further. Mortgage points are additional fees that homebuyers pay the mortgage lender upfront when closing the loan. 

Each point you purchase lowers your interest rate by a predetermined percentage point, which can vary by lender. Paying these upfront costs can save homebuyers tens of thousands of dollars on mortgages.  

However, they’re only worth it if you stay home long enough to recoup the mortgage point costs through lower monthly payments. Typically, it takes five to 10 years to recover the upfront costs of mortgage points. 

Get approved for an adjustable-rate mortgage

An adjustable-rate mortgage can be feasible to secure the lowest possible rate. With this type of mortgage, your payments can increase or decrease as interest rates change. 

When rates decrease, the interest on your adjustable-rate mortgage also decreases, reducing your monthly mortgage payment. Given the current stability of mortgage rates, it could be a good alternative. 

However, this option makes the most sense only if you’re searching for a starter home and need help to afford a fixed-rate mortgage. Considering how long you plan to stay at home is also essential when getting approved for an adjustable-rate mortgage. 

Prepare for Another Interest Rate Hike

Consumers, businesses, and investors anticipate interest rates to remain stable. But the Fed’s battle against elevated inflation might be far from over this year. The decision on an interest rate hike will depend on whether core inflation nears the two percent target in the coming months. 

Although you have no control over the Fed’s decision, you can get a better handle on your finances. The rate-hike pause can be advantageous for homebuyers to lock in a mortgage rate now before it goes higher toward the end of the year. 

Likewise, it can be an opportunity to evaluate your mortgage points and options for adjustable-rate mortgages. Both of which can aid you in securing a more favorable interest rate than what is currently available. No matter what, it’s always wise to prepare for the possibility of another interest rate hike. 


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