Will near zero interest rates mean near zero mortgages?
Amid the coronavirus (COVID-19) outbreak, the U.S. is grappling with the pandemic’s effects on the economy. Doubling down on these efforts to mitigate financial risk, the Federal Reserve recently took the drastic step of cutting a key interest rate to near zero.
On Sunday, March 15, the Fed unveiled the decision to cut its benchmark federal funds rate to a range of 0 percent to 0.25 percent. This decision of cutting the rates by 1 percent aimed to recover the U.S. economy from the current hits of COVID-19. But in its far reaching effects, the action has opened the line of thinking for so-called coronavirus mortgage rates.
Mortgage Rates May Fall, But Not Necessarily Due to This Cut
According to experts, mortgage rates would have to bear many consequences of COVID-19 and open new ways for buyers to benefit from lower payments. But these effects do not necessarily stem out of this rate cut.
By design, the Fed’s benchmark federal funds rate is a short-term interest rate. Whereas, mortgages are long-term loans that track long-term bond yields. That’s why, this recent cut doesn’t have a direct effect on mortgage rates.
But that’s where it gets interesting, especially if you have been planning to buy the home of your dreams long before the novel coronavirus hit the globe.
You Are Likely to See Lower Mortgage Rates in the Near Future
With the plummeting stocks and their influence on long-term bond yields such as 10-year Treasury bonds, mortgage rates have gone lower in the past few weeks.
Due to the way the COVID-19 situation is developing, you may see this trend catch on even further. As a result, those buyers who have been waiting to close on their ideal homes may make their decision during this crucial time.
But this movement of so-called coronavirus mortgage rates will not stay there for long. As inventory moves and long-term bond yields such as the 10-year and 30-year Treasury bonds recover, the mortgage rates may likely go up even during a time of financial uncertainty.
This is Not the First Time the Fed Has Cut Rates This Low
The last time the Fed took this measure of cutting its benchmark rate to near zero, the U.S. was preparing to drag itself out of the Great Recession of 2008. In fact, these lower rates stayed in place right until 2015, when the economy became fit to benefit from higher interest rates once again.
But even during this time, mortgage rates did not fall to near zero and stayed consistent with increased demands and a consistent movement of inventory. Even during the current period of so-called coronavirus mortgage rates, these interest rates have proven to bounce back periodically.
Bottom line: While the COVID-19 outbreak may cause mortgage rates to stay low for a while, they are likely to recover in the near future. If you are looking to close on your ideal home, this would be a great time to move forward with your decision.