What Happens When Interest Rates are Cut?

Read the news today and you’ll find a lot to digest – rate cuts, coronavirus, the election. While we’re not experts on global health or politics, we can break down what’s happening in the economy and what that means for you if you’re hoping to buy a home in the near future.

On Tuesday, March 3, 2020, the Federal Reserve made an emergency interest rate cut by half a percentage point, the steepest cut since the financial crisis in 2008. The Fed’s action comes as coronavirus continues to spread across the world and panic about the virus increases. Fed Chair Jerome H. Powell said he believes the rate cut will help protect the economy from a downturn disrupted by the CVOID-19 outbreak.

“We don’t think we have all the answers, but we do believe our action will provide meaningful support to the economy," Powell said in a news conference shortly after announcing the rate cut. “It will support accommodative conditions and avoid a tightening of financial conditions, and it will help boost household and business confidence.”

So what does this mean for mortgage interest rates?

Simply put, the rates have been falling steadily for a while now. While the Federal Reserve adjusts short-term rates, mortgage rates fluctuate based on long-term bond rates. So Tuesday, the Fed was responding to the bond market’s trend, according to economists.

With mortgage interest rates so low, the early part of the year, which is typically slower, has seen record activity in home purchases and refinances. You might have heard ‘now is the time to buy’ or ‘now is the time to refinance,’ and it really is. Demand for buyers remains high while rates are low, but the flip side is that there is a short supply of homes for sale. Some economists have called January the new “spring season” for buying.

In general, lower rates mean lower-cost borrowing, and it all boils down to saving more money.

If you’re in the market to buy a home, how can you take advantage of the lower rates? The most effective thing to do as a buyer is to get conditionally approved before you start your home search. This is called Upfront Underwriting or TBD underwriting.

Going through the underwriting process before finding a property will help you know exactly what you can afford so you’re able to browse homes within your comfort range and give you an idea of how much you’ll need to bring to the table for closing. Once you’ve found a property, your conditional approval quickly becomes a full approval once a few additional items are taken care of. Upfront Underwriting also helps set you apart from other buyers in a bidding war situation, as it is the closest thing to a cash offer. The sellers know that you’ve been conditionally approved, and therefore, you’re a more attractive seller.

If you’re ready to see how you can take advantage of these low rates, contact a mortgage banker today to get started.