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Mortgage Rates and the Fed: Why the Pause on Rate Hikes Matters

The central bank could still hike rates this year, so don't expect mortgage rates to go down.

Luka Banda/Getty Images

Mortgage rates aren’t the most thrilling thing to track, and neither are decisions by the Federal Reserve. But they’re both important to pay attention to if you’re in the market for a new home or refinancing your current one.

The Fed doesn’t directly set mortgage rates, but it does play an influential role. In a push to tamp down record-high inflation, the Fed has aggressively increased its federal funds rate from near zero to between 5.25% and 5.50% over the last year and a half. As a result, mortgage rates have moved above 7%.

While inflation is still high, the central bank took a breather from its aggressive rate-hike policy during this week’s September Federal Open Market Committee meeting. The Fed will hold rates where they are and monitor how inflation and the economy respond, but it has kept the door open to further rate hikes this year. 

A statement released Wednesday at the conclusion of the meeting says that the Fed “will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

Will a temporary pause in rate hikes help make buying a home more affordable in the short term? Not necessarily. Along with the Fed’s monetary policy, mortgage rates respond to several economic factors, including inflation, the strength of the labor market and housing market conditions. Here’s what to know. 

Read more: Mortgage Rate Predictions for September 2023: Will Rates Go Up?

What is the role of the Federal Reserve?

The Federal Reserve is the nation’s central bank. Consisting of 12 regional banks and 24 branches, the Fed is run by a board of governors who are voting members of the FOMC. 

The FOMC is responsible for setting overall monetary policy, with the goal of stabilizing the economy and its growth. It does so, in part, by setting the federal funds rate, the benchmark interest rate at which banks borrow and lend their money. 

In an inflationary environment, like the one we’re in today, the Fed utilizes rate hikes to make borrowing money more cost-prohibitive for both banks and people. Banks typically pass along rate hikes to people in the form of higher interest rates for longer-term loans, including mortgages. That has an impact on prospective homebuyers. 

What a pause from the Fed means for mortgage rates

If you’re looking to buy a home, you’ve likely felt the loss in your purchasing power over the past year, partly because of inflation and the Fed’s monetary policy decisions. Higher interest rates make it increasingly difficult to afford those monthly mortgage payments -- let alone today’s high home prices. 

The Fed’s latest decision to skip a rate hike at its September meeting could help ease some of the upward pressure on mortgage rates, but experts anticipate mortgage rates will stay elevated for some time. Marty Green, principal at mortgage law firm Polunsky Beitel Green, for instance, expects mortgage rates to remain near current levels before falling back under 7% in early 2024.

Even though economic data shows inflation is slowly cooling from its earlier record highs, the Fed isn’t going to consider cutting rates until it feels confident that inflation is staying steady at its target rate of 2%. (The most recent inflation report shows consumer prices rising at 3.7% year over year.) Housing market experts predict it might not be until 2024 when mortgage rates move closer to 6%.

In addition, the Fed has indicated that additional rate increases this year may be appropriate to bring inflation down even more. If that proves to be the case, mortgage rates will likely get pricier.

Factors that influence mortgage rates

While average mortgage rates as a whole are affected by broad economic factors like the Fed’s rate hikes, the individual rate you qualify for is determined by personal factors, such as your credit score and loan amount. You can’t time the market or control what the Fed does, but you can get the best rate possible for your situation by comparing offers from multiple lenders and making sure your credit is in good shape.

Macro factors 

In addition to policy changes from the Fed, mortgage rates move around for many of the same reasons home prices do: supply, demand, inflation and even the employment rate. 

  • Inflation: Generally, when inflation is high, mortgage rates tend to be high. Because inflation chips away at purchasing power, lenders set higher interest rates on loans to make up for that loss and ensure a profit.
  • Policy changes from the Fed: When the Fed adjusts the federal funds rate, it spills over into many aspects of the economy, including mortgage rates. The federal funds rate affects how much it costs banks to borrow money, which in turn affects what banks charge consumers to make a profit. 
  • Supply and demand: When demand for mortgages is high, lenders tend to raise interest rates. The reason is because lenders have only so much capital to lend out in the form of home loans. Conversely, when demand for mortgages is low, lenders slash interest rates in order to attract borrowers. 
  • The bond market: Mortgage lenders peg fixed interest rates, like fixed-rate mortgages, to bond rates. Mortgage bonds, also called mortgage-backed securities, are bundles of mortgages sold to investors and are closely tied to the 10-Year Treasury. When bond interest rates are high, the bond has less value on the market where investors buy and sell securities, causing mortgage interest rates to go up. 
  • Other economic indicators: Employment patterns and other aspects of the economy that affect investor confidence and consumer spending and borrowing also influence mortgage rates. For example, a strong jobs report and a robust economy could indicate greater demand for housing, which can put upward pressure on mortgage rates. When the economy slows and unemployment is high, mortgage rates tend to be lower.

Micro factors 

But there are other factors that affect mortgage rates. When loan volume slows, lenders slash rates and loosen their credit requirements. Borrowers with a subpar credit score may actually have a better chance to qualify for a mortgage in a higher-rate environment. 

When it comes to how a bank decides to make a loan, macroeconomic factors are only one part of the equation. There are a handful of much more specific factors that determine your particular mortgage interest rate. These include:

Things to consider if you’re shopping for a mortgage

Higher mortgage rates have taken a tremendous toll on many borrowers. “The increases in mortgage rates since the beginning of 2022 has been equivalent to more than a 32% increase in home prices -- and that’s on top of the already heady appreciation seen in the past couple of years,” said Greg McBride, chief financial analyst at Bankrate, CNET’s sister site. 

Although it’s tempting to wait out higher mortgage rates with talk of a potential recession on the horizon, it’s risky to try to time the market and wait for mortgage rates or home prices to drop. Even if home prices depreciate, elevated mortgage rates could still leave you with a higher monthly mortgage payment despite getting a good deal on your home. 

“People are better off buying in an elevated rate environment when there is less competition because when rates go back below 5% again, there will be a lot more competition for whatever existing inventory there is,” said Melissa Cohn, regional vice president at William Raveis Mortgage.

Regardless of what’s happening with the economy, the most important thing to consider when shopping for a mortgage is making sure that you can comfortably afford your monthly payments.

“From a financial perspective, the decision to buy a home comes down to a payment-to-paycheck calculation, which is influenced by income, mortgage rates and house prices,” said Odeta Kushi, deputy chief economist at First American Financial Corporation.

Keeping your day-to-day financial life healthy is what matters the most when making a significant financial decision such as buying your first home. Make sure to always shop around and compare mortgage lenders to ensure you’re getting the best rates and terms available to you.

How rising interest rates affect your home equity

If you already own a home, mortgage rate fluctuations won’t affect you as much as borrowers applying for a new mortgage. But they can affect your home equity. Despite a slight decrease in home prices though, homeowners are retaining high levels of tappable equity in their homes. 

“Typically, as rates go up, you start to see the valuations of real estate go down because the economy starts to slow up pretty quickly,” said Scott Lindner, national sales director for mortgage lending at TD Bank. “What we’re seeing here is a continued firmness of the value of real estate, so it’s not going up, but it’s not dropping significantly. That’s primarily because there’s a lack of inventory.”

As a homeowner with a fixed-rate mortgage, you might not be affected by the fluctuation of mortgage rates. But if you’re trying to sell your home, higher rates could limit the number of would-be homebuyers in your local market. 

What’s more significant for homeowners shopping for home equity loans and home equity lines of credit, or HELOCs, is the prime rate -- another baseline rate banks use for lending. With mortgage rates above 6%, a cash-out refinance likely won’t make financial sense for most homeowners who already locked in lower mortgage rates during the pandemic.

In a rising interest rate environment, home equity loans and HELOCs can be a good option for financing. You can borrow against your home equity at a relatively low interest rate, and with a home equity loan, you can lock in a fixed interest rate -- meaning your monthly payments will remain the same even if rates rise. 

However, home equity loans and HELOCs come with a risk. Since these loans are secured loans, you run the risk of losing your home if you default on your monthly payments for any reason.

The bottom line

When the Federal Reserve adjusts the benchmark interest rate, it indirectly affects mortgage rates. The Fed’s decision to pause rate hikes in September won’t have a dramatic immediate impact on mortgage rates. Instead, mortgage rates will respond to changing expectations of inflation and the broader economic outlook.  If you’re shopping for a mortgage, make sure to compare the rates and terms being offered by banks and lenders. The more lenders you interview, the better your chances are of securing yourself a lower mortgage rate, especially in an elevated interest rate environment.

First published on Sept. 20, 2022, at 12:48 p.m. PT.

Katherine Watt is a CNET Money writer focusing on mortgages, home equity and banking. She previously wrote about personal finance for NextAdvisor. Based in New York, Katherine graduated summa cum laude from Colgate University with a bachelor's degree in English literature.
Alix is a former CNET Money staff writer. She also previously reported on retirement and investing for and was a staff writer at Time magazine. Her work has also appeared in various publications, such as Fortune, InStyle and Travel + Leisure, and she also worked in social media and digital production at NBC Nightly News with Lester Holt and NY1. She graduated from the Craig Newmark Graduate School of Journalism at CUNY and Villanova University. When not checking Twitter, Alix likes to hike, play tennis and watch her neighbors' dogs. Now based out of Los Angeles, Alix doesn't miss the New York City subway one bit.