Fed Rate Hikes: What Home Buyers Get Wrong
A Fed rate hike tends to grab attention, especially from home buyers and homeowners wondering what it means for mortgage rates.
One of the biggest misconceptions is that if the Federal Reserve raises its target rate by a quarter point, mortgage rates automatically go up by a quarter point too.
That is not necessarily how it works.
In this episode of Real Estate Tip Tuesday, Katie Halle Lambert, Associate Broker with Team EvoAZ at eXp Realty, and Ryan Gilliam with Your Best Mortgage explain why Fed rate hikes and mortgage rates can move differently, why the mortgage market may react before a Fed announcement ever happens, and what buyers and sellers should actually be paying attention to.
Does a Fed Rate Hike Automatically Raise Mortgage Rates?
No. As Ryan explains in the episode, the federal funds rate is a very short-term interest rate.
Changes to it can have a more direct impact on things such as:
Credit cards
Car loans
Home equity lines of credit
A 30-year fixed mortgage, on the other hand, is a long-term loan.
Mortgage rates are influenced much more by factors such as the bond market, mortgage-backed securities, and long-term Treasury yields.
That means the Fed can raise its target rate while mortgage rates go up, go down, or barely move at all.
A lot depends on what the market was already expecting.
Mortgage Rates Often React Before the Fed Meeting
Mortgage markets are constantly looking ahead.
According to Ryan, the bond market is trying to anticipate what could happen with inflation, employment, economic growth, and future Fed policy.
If investors widely expect the Fed to raise its rate by a quarter point, for example, that expectation may already be reflected in mortgage rates weeks before the Fed actually meets.
That is why the announcement itself is not always the biggest piece of information for mortgage rates.
What the Fed communicates about what could happen next may matter just as much.
As Ryan explains, that can occasionally create situations where the Fed raises rates and mortgage rates improve afterward, or where the Fed cuts rates and mortgage rates move higher.
Why Fed Communication Matters to Mortgage Rates
The episode also discusses how uncertainty about future Fed policy can influence the market.
Ryan describes the recent Fed meeting as a bit of a roller coaster. Mortgage rates had already increased in the weeks leading up to the meeting as the market anticipated a quarter-point increase.
When the expected increase was announced, mortgage rates briefly moved lower.
But the market's reaction changed after the Fed chair spoke about inflation and the possibility that additional tightening could be needed.
The key issue was uncertainty about what might happen next.
When the market has a harder time predicting future policy, mortgage rates can respond even when the Fed's immediate rate decision was already expected.
What Should Home Buyers Pay Attention to?
Ryan's advice is not to make a home-buying decision based on a single Fed meeting.
Rather than reacting to every headline, buyers can focus on the mortgage rate and monthly payment that are actually available to them today.
The bigger question is whether that payment works within the buyer's budget.
Trying to perfectly time mortgage rates can be incredibly difficult because market conditions can change from day to day or week to week.
Seller Concessions Can Help Buyers With Their Payment
Katie and Ryan also point out that buyers may have negotiating opportunities in the current market.
Seller concessions can sometimes be used toward an interest-rate buydown, depending on the transaction and lender guidelines.
They also discuss temporary buydowns, which may reduce the buyer's mortgage rate during the early years of the loan.
The exact structure and availability of any buydown will depend on the loan program, lender requirements, transaction, and buyer eligibility.
For buyers, that means the conversation does not necessarily have to begin and end with the advertised mortgage rate.
It can also include the home's price, available concessions, the monthly payment, and other terms that may be negotiable.
Why This Matters for Sellers Too
Understanding mortgage rates is not only important for buyers.
Sellers benefit from understanding what buyers are considering when deciding whether to make an offer and what payment they can afford.
Katie notes that today's buyers may have opportunities to negotiate not only concessions but also the home's price or property-related items such as a roof or air-conditioning unit.
If mortgage rates eventually move lower and more buyers enter the market, the negotiating environment could look different.
That is why sellers should pay attention to financing conditions and the challenges buyers are weighing when deciding whether to purchase a home.
Focus on the House and Payment That Work for You
The main takeaway from this Real Estate Tip Tuesday is simple: a Fed rate hike does not automatically translate into an identical increase in mortgage rates.
Mortgage markets are forward-looking, and expectations surrounding inflation, employment, economic conditions, and future Fed decisions can all influence how rates move.
Instead of trying to make a buying or selling decision around one Fed headline, buyers can look at the home, financing options, negotiations, and payment available to them now.
Individual circumstances vary, and mortgage rates, loan programs, concessions, and buydown options depend on eligibility, lender guidelines, and the specific transaction. This information is for educational purposes only and is not financial or legal advice. Buyers and homeowners should consult a licensed lender and qualified real estate professional about their individual situation.
Prefer to Watch Instead?
Want to hear Katie and Ryan explain why Fed rate hikes and mortgage rates do not always move together?
Watch this Real Estate Tip Tuesday episode for their conversation about how the mortgage market reacts and what buyers and sellers should focus on instead of a single Fed headline.
Have Questions About Buying or Selling a Home?
Team EvoAZ can help you navigate the real estate side of your purchase and understand the documents and deadlines that come with an Arizona home transaction.
Katie Halle Lambert | Team EvoAZ
Text ConnectWithKatie to 480-508-9828
Have Questions About Your Mortgage?
Whether you're purchasing your first home, refinancing, or simply have questions about your financing options, Ryan is here to help.
Ryan Gilliam | Your Best Mortgage
Text ConnectWithRyan to 480-508-9828
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Looking for homes in the Phoenix area? Text GetPhoenixDeals to 480-508-9828 to browse current listings and great opportunities.
〰️ Looking for homes in the Phoenix area? Text GetPhoenixDeals to 480-508-9828 to browse current listings and great opportunities.
Disclaimer: This video is prerecorded. The information provided in this video is for educational purposes only and not financial or legal advice. Always consult a licensed lender, real estate agent, or wealth manager for guidance specific to your situation.
