Shmuel Shayowitz (NMLS#19871) is President and Chief Lending Officer at Approved Funding, a privately held local mortgage banker and direct lender. Shmuel has over two decades of industry experience, including licenses and certifications as a certified mortgage underwriter, residential review appraiser, licensed real estate agent, and direct FHA specialized underwriter. Shmuel provides a uniquely holistic approach to comprehensive real estate and financial matters that goes well beyond any single transaction. Shmuel is an award-winning financier recognized for maximizing the short-term and long-term objectives of his client. As a contributing writer to many local and regional newspapers and publications, his insights have been featured in the media for many topics, including mortgages, personal finance, appraisals, and real estate trends.
This week we had a crucial meeting by The Federal Reserve and its chair, Jerome Powell. The policymaking Federal Open Market Committee voted to keep rates steady near zero. The committee members are forecasting unemployment to fall to 4.5% from the current level of 6.2%. Expectations for core inflation have moved higher, with the Fed now looking for a 2.2% gain. They are continuing their asset purchasing program with seemingly no change. Finally, the Fed still expects its benchmark interest rates to remain unchanged through 2023 – meaning no “rate hikes.”
Immediately following the announcements on the news, I got my typical slew of calls from ambitious applicants looking to take advantage of the fact that the Fed didn’t “raise rates.” They were a little disappointed when I explained how this process actually works but appreciative of learning the mechanics of the market. Fortunately, I did map out an opportunity for each of them to save on their current payments or cash out some much-needed funds to take care of debts or expenditures they were seeking. Thankfully, rates are still at historical lows despite how the media is trying to spin it.
Before we can determine the effect that a Federal Reserve rate change has on mortgage rates, it is necessary to know that the Federal Reserve does not control mortgage rates whatsoever. The Federal Reserve can control essential instruments such as the “Discount Rate” and “Fed Funds Rate,” which ultimately influence other market indices, but that is the extent of their ability regarding lending.
The “Federal Funds Target Rate” is a short-term rate objective that the Federal Reserve Board sets at its FOMC meetings. This rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight. The accurate rate may change intermittently, but it is usually very close to the target rate desired by the Federal Reserve.
The “Discount Rate” is the interest rate that banks pay when they borrow money directly from the Fed, usually on a short-term basis, to meet temporary shortages of liquidity caused by internal or external disruptions. The rate has been largely symbolic in the past and is typically at least 1% higher than the Fed Funds rates. Because of this, hardly any banks utilize this source or method of obtaining funds except during emergencies.
The “Prime Rate” has generally been known as the interest rate charged to the most creditworthy bank consumers. These loans are typically extended to debts such as credit cards and home equity lines of credit, as well as most small business loans. The Prime Rate is directly tied to the Fed Funds Rate and is typically three points higher than the published Fed Funds Rate.
Now that you have a better idea of the different rates in the marketplace, you see that the only direct effect on a consumer is through a change to the Prime Rate. When the Fed increases the targeted Fed Funds rate, consumers will be affected by receiving a higher rate on their prime-based loans as indicated above, beginning the following month after a rate increase. The bottom line is that there was no change in Fed policy this week, so it’s vital to position yourself now – while rates are still low – for the best solution for your personal needs.
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