How Does The Fed Affect Mortgage Interest Rates?

The Federal Reserve spent much of 2022 and 2023 bumping the federal funds rate higher in an effort to curb inflation. Although the Fed doesn’t directly affect mortgage rates, its management of the federal funds rate influences mortgage lenders and (along with other factors) helps them decide how much interest to charge on mortgage loans.

If you’re thinking about taking out a home loan, here’s what you need to know about how the Fed does, and doesn’t, impact your mortgage rate.

The Federal Reserve, or Fed, is the central banking system of the United States. The Fed’s main purpose, known as its dual mandate, is to provide price stability (i.e. manage inflation) and maintain sustainable employment levels.

One of the ways the Fed accomplishes its mission is by adjusting the federal funds rate. The federal funds rate is the benchmark short-term interest rate banks and other financial institutions charge each other for overnight loans. When the Fed raises this rate, it makes it more expensive for financial institutions to operate. Those institutions usually respond by charging more interest on loans. That means everything from auto loans to mortgages becomes more expensive for consumers.

Most of what goes into your mortgage rate is out of your control. However, there are personal factors involved. Your credit score, type of loan, loan amount and down payment all come into play.

As you increase your credit score and down payment, the mortgage rate you’re eligible for will drop. You don’t need a perfect credit score to secure a good rate. If you want the best rate, aim for a good to excellent credit score and a down payment of 20%. That said, a large down payment is less realistic for many first-time buyers and you can qualify for a mortgage with little to no down payment with government-backed loans, such as VA loans, USDA loans and FHA loans. Navy Federal Credit Union is one of CNBC Select’s best mortgage lenders for a small down payment and can be a good option if you’re eligible for a VA loan, which requires as little as 0% down.

The Federal Reserve doesn’t directly set mortgage rates. However, it can influence mortgage interest rates by adjusting the federal funds rate and buying or selling bonds and mortgage-backed securities. There is a range of other factors that affect mortgage rates, including inflation, demand for mortgages and your individual situation.

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