What is the federal funds rate and why is it always talked about so much? How does it impact you as a buyer or seller?

The federal funds rate is basically an interest rate charged between banks when they lend each other money overnight. This is an important rate because it’s guided and set by the Federal Reserve. A lot of people assume that when the federal funds rate goes up or down, mortgage rates follow suit. The truth, though, is that rarely happens. The federal funds rate rarely has a direct impact on mortgage rates. Sometimes, they go in opposite directions. 

If you’re interested in knowing what mortgage rates will do and how that will affect your buying or selling plans, the 10-Year Treasury note is the rate you want to follow. It’s a short-term rate that pays interest at a fixed rate once every six months, and it ties in almost exactly with where mortgage rates for a 30-year loan will be. 

What’s interesting about this is when interest rates are expected to rise, people assume home prices might fall. That’s possible—unless your mortgage rate is pretty low, you probably don’t like to hear that mortgage rates are going up. However, if you’re thinking about buying another house and want to sell your current one, that house suddenly becomes less affordable to buyers. 

“The federal funds rate rarely has a direct impact on mortgage rates.”

On the other hand, when mortgage rates drop, people get excited because they think they can afford a house, so more buyers rush the market. That demand boosts home prices, and since existing buyers think they can afford higher-priced homes, that increases prices even further. 

So, if you’re a seller, should you sell in 2020 or stay put? I’ll say this: There is a likelihood that interest rates for mortgages creep up, because lenders are dying to push rates up a little bit. Don’t pay much attention to the federal funds rate, though. 

If you want to talk more about your goals for 2020 and whether it’s best to sell now or later, give me a call. We’ll examine the micro-trends of your specific marketplace and decide what’s best. I look forward to hearing from you.