Normally, the Fed doesn’t directly influence mortgage rates at all, the rates go up and down based on the market. Sometimes when they lower “the rate” meaning the Fed Funds rate, mortgage rates actually go up if the market fears more inflation. However, to boost the real estate market, the Fed has recently begun buying mortgages to directly influence mortgage rates, and the result has been rates as low as 4.75% today.
Everyone knows that a lower rate results in a lower payment as long as the loan balance stays the same. However, did you know that the amount going towards principle actually goes up, not just the percentage of the payment but the actual amount? For example, when rates were languishing around 6.25% (still a pretty darn good rate) a $300,000 30 year loan would have resulted in a payment of about $1847 with about $285 of the first month payment going toward principle. With rates now down at 4.75% the payment would drop to $1565 with $377 going to pay down the loan. The result is actually the same as getting the house for a lower price, in fact a little better. If you’re able to look into the future five years, with 6.25% the balance will be $280,012 while at 4.75% the balance will be $274,495. In that same five years you’ve also saved nearly $17,000 in payments (actually $16,933) for a total savings of $22,450 in five years.
It would probably be a good idea to take advantage of this.
How did the Fed buy mortgages? They actually bought mortgage backed securities, in particular, those issued by FNMA and FHLMC, these two Government Sponsored agencies buy and securitize mortgages, packaging loans into securities to sell to investors. In this case, the Fed was an investor, thereby increasing demand for the securities, pushing down the mortgage rates. It’s difficult to imagine they could keep this up forever, this feels like a special opportunity for home buyers.
