As a Fed rate cut looms, mortgage rates fall to their lowest ever
Less than three months ago, the Federal Reserve announced it wouldn’t touch interest rates in 2020.
Then coronavirus spread. The stock market plummeted, and the Fed did a 180.
There’s now a 100% chance the Federal Reserve will lower the fed funds rate by a half percent when it meets this month.
Mortgage lenders are already pricing those predictions into their loans. As of Monday, mortgage rates hit their lowest average on record, according to Mortgage News Daily.
| Loan type | Current Rate for March 2, 2020* | APR |
| Conventional 30-year |
3.375% |
3.375% |
| FHA 30-year |
2.750% |
3.730% |
| VA 30-year |
2.750% |
2.926% |
They could inch lower still, and borrowers should be prepared to lock a rate as soon as possible — whether that’s today, this week, or next.
Find a mortgage rate and prepare to lock today (Mar 2nd, 2020)*
Why the Federal Reserve is considering a rate cut
Coronavirus has rocked financial markets worldwide. There’s speculation that the Fed and other global central banks will soon take action to help stabilize national economies.
On Friday afternoon, Federal Reserve Chair, Jerome Powell said they are closely monitoring the coronavirus and would “use our tools and act as appropriate to support the economy.”
The Federal Reserve doesn’t control mortgage rates. But its decisions impact the way most interest rates move.
That likely means lowering the fed funds rate — the target interest rate for banks to borrow from one another overnight.
The fed funds rate doesn’t dictate mortgage rates. But a rate cut by the Fed still has an impact on the overall market environment, which in turn impacts mortgage borrowers.
What can borrowers expect when the Fed meets later this month?
Given an economic slowdown and lower interest rates worldwide, the Fed may elect to lower the target level of the federal funds rate.
According to the Fed Chair, the “fundamentals of the U.S. economy remain strong.”
But he also noted that “the coronavirus poses evolving risks to economic activity” and that the Fed “is closely monitoring developments and their implications for the economic outlook.”
There’s now a 100% likelihood that the Fed will cut its target rate by 0.50%.
Expectations that the central bank will cut borrowing costs have skyrocketed as new coronavirus cases outside China continue to mount, and economists saw Mr. Powell’s statement as a signal that the Fed would act soon to offset any economic fallout.
This was clearly an attempt to quiet some of the fears. But it’s also a strong indication that a rate cut is inevitable.
So how much of a rate cut could you expect to see?
With a 180 degree turnaround since December, there’s now a 100% likelihood that the Fed will cut its target rate by 0.50%.
This is a substantial cut, given that the fed funds rate is normally only adjusted by 0.25% at a time.
Verify your new rate (Mar 2nd, 2020)Mortgage-backed securities and other factors impacting rates
Like we said above, the Federal Reserve is not in charge of mortgage rates. There are plenty of other factors pushing today’s rates down.
Another huge reason mortgage rates are so low has to do with basic supply and demand for something called “mortgage-backed securities.” Here’s how it works:
A financial instrument known as mortgage-backed securities (MBS) controls the ups and downs of interest rates for mortgages. And MBS have to answer to end investors, namely investing groups that collect interest on those mortgages.
When the stock market is in turmoil — as it is now — investors tend to move money into “safer” investments like MBS.
That means as the value of MBS goes up, there’s more demand — and mortgage rates, in turn, go down.
We saw exactly that happening last week in real-time.
On Friday, the Dow was down 350 points, after being down around 1,000 points earlier in the day.
For the week, mortgage-backed securities (MBS) rose about 1 and 8/32 points (a huge move for MBS).
As a result, some favorable repricing was seen from mortgage lenders. And if more investors continue flocking to MBS, we could potentially see rates go lower still.
cta-link linktext=”Find a low mortgage rate today and prepare to lock”]
How coronavirus (COVID-19) has turned U.S markets inside out
The coronavirus has traumatized companies and investors around the world to their cores, impacting both Wall Street and the mortgage marketplace.
Most of China remains shut down by the coronavirus, which first emerged in the Chinese city of Wuhan and has sickened thousands of people in around the world.
The sudden standstill to business for many global companies can have significant effects that impact far more than just China.
According to the New York Times, many companies “have come to rely on China for its efficient factories, and its increasingly affluent consumers and its years of hard-charging economic growth.”
General Motors, Ford, Nissan and other auto companies have temporarily closed factories. Apple and Starbucks have closed stores.
The global economic outlook, the fortunes of major companies and the jobs of workers around the world could depend on how quickly they come back.
Stock market indexes have slumped on virus worries. And money has been pouring into United States government securities as people look for safe investments, pushing prices up and sinking yields on 10-year Treasuries to record lows.
When there is investor uncertainty, money tends to flow into the United States, the world’s most stable market. With more money in domestic markets interest rates tend to fall.
While this can be bad news for many stock investors, it can be good for mortgage borrowers.
Lock a rate now or wait and see?
A Fed rate cut would directly impact Home Equity Lines of Credit (HELOCs). However, a rate cut won’t impact most mortgage rates directly.
Mortgage and refinance rates have already been tumbling in the past few weeks thanks to the effect of Wuhan coronavirus.
The main force pushing mortgage rates down right now is the Wuhan coronavirus.
Mortgage rates could drop again, or suddenly skyrocket. Coronavirus news will likely be the determining factor.
Lenders are already pricing in changes prior to a Fed rate cut… there’s a chance that rates could remain relatively unchanged even with a 50-basis-point cut later this month.
But remember, in all likelihood, lenders are already pricing in changes prior to a rate cut by the Fed. This means there’s a chance that rates could remain relatively unchanged even with a 50-basis point cut later this month.
Then again, there could be a short window of sub-3% rates that home buyers and refinancers will want to take advantage of.
Verify your new rate (Mar 2nd, 2020)Consider a “float down provision”
For mortgage borrowers that need to lock in their rate now, there is one strategy worth exploring.
This is especially for those that think rates may go even lower. Ask your lender if they have a “float down provision.”
Some lenders allow you to float down your locked-in rate should rates go lower before your loan is set to close.
Typically, lenders have provisions that say how far rates need to drop in order to take advantage of a float down.
For example, if rates dropped by half a point, your lender may allow for a one-time float down by a quarter of a point. Many lenders also require that you be within two weeks of your closing date to exercise a float down.
Float down agreements vary among lenders so be sure to ask how the program works, what’s allowed and what isn’t.
What to do this week in light of the Fed rate cut
Regardless of whether you’re already locked in now, about to lock, or you’re going to wait it out to see what happens after the Fed meeting, one fact remains true.
You’re most likely getting a rate that’s at or near its lowest in U.S. history.
Find out what rate you qualify for today.
Verify your new rate (Mar 2nd, 2020)
