The Fed Slashed Interest Rates. Here’s Why Mortgage Rates Likely Won’t Follow Suit

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Mortgage rates, like the stock market, have been on a wild ride in recent weeks. They dropped to record lows earlier this month in response to the spread of COVID-19—and then shot right back up again. And it looks like it’s about to get even bumpier after the Federal Reserve slashed its own interest rates over the weekend in a bid to stave off a recession.

That means mortgage interest rates are likely to go back down again—a boon for homeowners and homeowners hoping to refinance their existing loans to save on their monthly housing bills. But they’re not expected to plummet to the Fed’s new short-term rates of between 0% and 0.25%. Instead, mortgage rates are likely to drop from about 4% on Friday to the mid- to low-3% range in the coming weeks, mortgage experts predict.

These rates are for 30-year fixed-rate loans. Rates are lower for short-term and jumbo mortgages.

“Mortgage rates will go lower. [And] that’s good news for buyers,” says realtor.com®’s chief economist, Danielle Hale. “It’s probably enough, based on what we know now, to keep buyers in the market. It’s also going to help people refinance and have more cash in their pockets.”

Rates hit a low of 3.29% on March 5, according to Freddie Mac. That’s as low as they’ve been since Freddie Mac began tracking mortgage interest rates in 1971—nearly 50 years ago.

But then mortgage rates did something surprising: They rose. Despite the coronavirus-ravaged stock market and growing fears of a recession, they ticked up to 3.36% as of Thursday, according to Freddie Mac. Mortgage News Daily (which is not affiliated with Freddie Mac and measures rates differently) reported they had risen to 4% by Friday on 30-year fixed-rate loans.

That’s because homeowners rushed in, seeking to refinance their existing mortgages to save some serious dough. Many have been able to shave hundreds of dollars off their monthly mortgage payments and tens of thousands of dollars off the life of their 30-year loans. Many overwhelmed mortgage lenders responded by upping rates to keep the flood of refinances at bay.

“We all have way, way more [business] than we can handle,” says Elysia Stobbe, author of “How to Get Approved for the Best Mortgage Without Sticking a Fork in Your Eye.” “Right now we’re all at three times normal capacity.”

All of those refinances also created something of a glut in the secondary mortgage market, which also contributed to higher mortgage interest rates. Lenders typically don’t like to keep the home loans they make on their books, so they sell these loans, which are bundled into a collection of mortgage-backed securities, to investors in the secondary market. This way banks and other financial institutions have more cash on hand to make additional loans.

The influx of refinances in the secondary market meant lower prices for the securities. And since mortgage bonds and mortgage rates move in opposite directions, rates went up.

But the Fed announced on Sunday that it would buy up at least $500 billion in U.S. Treasury bonds and $200 billion in government mortgage-backed securities over the coming months. That’s likely to help absorb the surge in refinances, stabilizing the mortgage-backed securities. And that means mortgage interest rates will likely tumble.

“That should stabilize rates and bring them back down lower,” says Hale. “They’ll [likely] go back to the low 3% [range]. Might we see rates below 3%? I wouldn’t rule it out.”

However, some investors are still spooked by the bad mortgages that were part of the housing bust that led to a financial meltdown just over a decade ago. They may be inclined to shy away from the securities with another recession looming despite the government’s investment in them, says Ali Wolf, chief economist at Meyers Research, a national real estate consultancy.

“That could put a limit on how low mortgage rates could go,” Wolf says.

She expects they’ll fall into the 3.1% to 3.2% range within the next few weeks and stay within or under the mid-3% stretch through the rest of the year.

“Today’s low mortgage rates are equivalent, in some cases, to $30,000 off the price of a home” in some of the nation’s most expensive markets, says Wolf. In Los Angeles, rates around 3.6% can bring monthly mortgage payments down to what they were in 2015. “Mortgage rates are turning back time on affordability.”

The bigger, more immediate question: Will buyers want to close on a home with the COVID-19 pandemic sweeping the globe, leaving many workers in the lurch and the nation on the verge of a recession?

“The idea of social distancing affects the mentality of both buyers and sellers,” says Hale.

Some sellers may decide to pull their properties off the market in response to the crisis. They may not want strangers walking through their homes right now, especially if they’re still living in them.

Other folks may be nervous about what could amount to the largest purchase of their lives if they’re worried about the economy and the security of their jobs.

“We may see a slower than normal spring selling season,” says Wolf. “But those sales will likely return in the summer and fall, assuming we get past the worst of COVID-19.”

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