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How the Fed is Helping Slash Mortgage Rates

By Brian O’Connell
The Federal Reserve may not have moved interest rates last week, but it has continued an oft-overlooked program that has kept downward pressure on mortgage rates. It’s all about buying mortgage-backed securities -- $1.25 trillion’s worth.

Category Product: 
Mortgages
Category Finance: 
Personal Finance
Keywords: 
Mortgages, Federal Reserve, Buying a Home, Refinancing, Slashing Rates, Interest Rates, ARM, Fixed Rate
Introduction: 

By Brian O’Connell
The Federal Reserve may not have moved interest rates last week, but it has continued an oft-overlooked program that has kept downward pressure on mortgage rates. It’s all about buying mortgage-backed securities -- $1.25 trillion’s worth.

That’s the amount of dough that the Fed is pouring into its new mortgage purchase program, and it’s paying off for consumers in the form of significantly lower mortgage interest rates.

How big a boost are mortgage consumers getting from the Fed program? Put it this way. A year ago, before the buyback program was launched, mortgage rates were over 6%. But this week based on sbup’s weekly mortgage rate averages, rates are down to 4.82% for 15-year fixed-rate mortgages, and 5.09% for 30-year fixed-rate mortgages.

Mortgage interest rates below 5% are historically fairly rare. According to mortgage behemoth Freddie Mac, which has tracked mortgage rates since 1971, April’s 30-year fixed mortgage rates were the lowest on record. And 15-year fixed-rate mortgages are their lowest points since 1991, according to Freddie Mac.

The Fed’s formula for bringing mortgages rates down is through its massive mortgage purchase program. Essentially, the Fed buys mortgage-backed securities and lends them to big mortgage lenders like Freddie Mac and Fannie Mae, who in turn make more home loans available to consumers.

The program has proved a soothing balm for homebuyers and homeowners looking to refinance who were having trouble getting credit and finding favorable rates that would make a home purchase or a refinance more affordable.

Lower mortgage rates definitely help in that regard. Take a $300,000 loan on a 30-year fixed mortgage rate of 6.25%. The monthly payment on that loan would be $1,847.15, according to the sbup Fixed Mortgage Loan Calculator. But the same loan at a rate of 4.875% has a monthly payment of $1,587.62.

The shelf life for lower rates may not be a long one. The Fed, in a statement last week, said that the threat of inflation remained low, making it possible for the Fed to keep rates low. But while low inflation may be the status quo for the next few months, it won’t remain low forever. To stave off inflation – a historically big threat to the economy – the Fed usually hikes interest rates to keep the economy in balance.

“In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term,” said the Federal Reserve in a statement last week.

“In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion.”

There’s little doubt that the Feds mortgage back securities purchase program has helped drive mortgage rates lower. That should bring more borrowers into the market, and help stabilize sagging home prices. Indeed, statistics already show that home prices have rebounded over the past two months, especially in hard hit areas like California.

For homebuyers, it would seem, the future really is now.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.

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That’s the amount of dough that the Fed is pouring into its new mortgage purchase program, and it’s paying off for consumers in the form of significantly lower mortgage interest rates.

How big a boost are mortgage consumers getting from the Fed program? Put it this way. A year ago, before the buyback program was launched, mortgage rates were over 6%. But this week based on sbup’s weekly mortgage rate averages, rates are down to 4.82% for 15-year fixed-rate mortgages, and 5.09% for 30-year fixed-rate mortgages.

Mortgage interest rates below 5% are historically fairly rare. According to mortgage behemoth Freddie Mac, which has tracked mortgage rates since 1971, April’s 30-year fixed mortgage rates were the lowest on record. And 15-year fixed-rate mortgages are their lowest points since 1991, according to Freddie Mac.

The Fed’s formula for bringing mortgages rates down is through its massive mortgage purchase program. Essentially, the Fed buys mortgage-backed securities and lends them to big mortgage lenders like Freddie Mac and Fannie Mae, who in turn make more home loans available to consumers.

The program has proved a soothing balm for homebuyers and homeowners looking to refinance who were having trouble getting credit and finding favorable rates that would make a home purchase or a refinance more affordable.

Lower mortgage rates definitely help in that regard. Take a $300,000 loan on a 30-year fixed mortgage rate of 6.25%. The monthly payment on that loan would be $1,847.15, according to the sbup Fixed Mortgage Loan Calculator. But the same loan at a rate of 4.875% has a monthly payment of $1,587.62.

The shelf life for lower rates may not be a long one. The Fed, in a statement last week, said that the threat of inflation remained low, making it possible for the Fed to keep rates low. But while low inflation may be the status quo for the next few months, it won’t remain low forever. To stave off inflation – a historically big threat to the economy – the Fed usually hikes interest rates to keep the economy in balance.

“In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term,” said the Federal Reserve in a statement last week.

“In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion.”

There’s little doubt that the Feds mortgage back securities purchase program has helped drive mortgage rates lower. That should bring more borrowers into the market, and help stabilize sagging home prices. Indeed, statistics already show that home prices have rebounded over the past two months, especially in hard hit areas like California.

For homebuyers, it would seem, the future really is now.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.

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