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How Federal Reserve Policies Affect Home Loans

Many factors can affect rates for home loans including the borrower’s financial state, the location of the property, the loan type and terms, and supply and demand. Additionally, another major aspect influencing home loan rates is the Federal Reserve’s monetary policy. Below, we’ve discussed the matter in detail.

What Is the Federal Reserve?

The Federal Reserve (Fed) is the central bank of the United States, established in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. It operates independently from the federal government but is subject to congressional oversight. 

Its main goals include managing inflation, maximizing employment, and stabilizing interest rates. 

The Fed’s key components are the Board of Governors, twelve regional Federal Reserve Banks, and the Federal Open Market Committee (FOMC), which sets monetary policy. As a whole, the Fed regulates the banking industry and controls money supply and interest rates to influence the economy.


How Do Federal Reserve Policies Impact Home Loans? 

The Federal Reserve isn’t directly in control of setting mortgage rates. However, the policies set by the Fed do have an impact on borrowing costs. 

Between the beginning of 2022 and the end of 2023, the Federal Reserve raised interest rates 11 times. This was their most aggressive rate-hiking campaign in nearly four decades. However, experts have stated that they believe the Fed will be cutting rates in the near future.

When the Federal Reserve increases the federal funds rate, it directly raises the cost for banks to borrow money. Banks then pass these higher costs onto consumers by raising interest rates on loans, including mortgages. Here’s how this process affects mortgage rates:

  • Interest rate expectations: If lenders believe inflation will rise or the Fed will increase rates further, they’ll hike mortgage rates to protect their profits against future cost increases.
  • 10-year treasury bond: Mortgage rates often follow the yield on the 10-year Treasury bond. If the yield goes up—often in anticipation of Fed actions or inflation—mortgage rates usually climb, too, since both are competing for the same investors.
  • Mortgage-backed securities: The demand for mortgage-backed securities also influences mortgage rates. If the Fed buys these securities, demand increases, yields drop, and so do mortgage rates. Conversely, if demand falls, yields and mortgage rates rise.


Speak to a Home Loan Expert

The Federal Reserve’s impact on rates for home loans is a complex topic. But the good news is that you don’t have to navigate matters like these on your own. We’re always available to help. Call today to speak to a home loan expert and get the information you need.