May 26, 2016 | By RGR Marketing Blog

The Federal Reserve and Your Mortgage Business

As a mortgage professional, you have a vested interest in knowing what the Federal Reserve’s Open Market Committee is up to. The FOMC sets the federal funds rate, which is the interest rate at which financial institutions borrow money from each other.

As you know, the Fed doesn’t actually set mortgage rates, but the policy levers pulled by Federal Reserve Chairwoman Janet Yellen and colleagues directly impact the mortgage rates lenders are willing to offer. When the federal funds rate goes up, so do the rates at which your clients can borrow money to fund the purchase of a new home.

Make No Mistake: a Rate Hike Is Coming

While the most recent FOMC meeting was seen as a forestalling of any change to the federal funds rate, a majority of economists are relatively certain that a rate hike is on the horizon.

The possibility of a higher federal funds rate isn’t exactly news, and it’s not necessarily a bad thing. Interest rates have hovered just above zero for a record-breaking stretch, which has been good for homebuyers. But critics say these low interest rates have contributed to instability in the market, and that the economic benchmarks that would indicate a rate hike have been met.

Good For Market Stability, Less So For Prospective Homebuyers

But for prospective homebuyers, the prospect of higher interest rates is unwelcome. Even a small rate hike can mean many thousands of dollars in extra interest over the course of a 30-year fixed-rate mortgage.

If you’re in the mortgage business, then you know that higher interest rates are coming, and that it’s only a matter of time. But that doesn’t mean people will stop buying homes.

Even With a Rate Hike, Mortgage Interest Will Still Be Low

Still, low interest rates have been a strong selling point for mortgage originators. If they go up as they’re expected to at least once before the year is over, how will that change your approach to marketing?

Sure, your clients might feel like they’ve missed the boat on the golden opportunity to lock in a mortgage at 4% and change. How will you help them get over that sense of regret?

A Walk Down Memory Lane

Some historical perspective should do the job. When the rate hike happens, just show your clients a graph of how mortgage rates used to look.

Direct their attention to the early 1980s, when interest rates topped 18%. Show them how mortgage rates generally stayed between 7-9% in the 1990s, or how just before the bubble burst, they were still above 6 percent.

Then show them the part of the graph that represents where we are now: this lush, green valley of impossibly low interest rates. Compared with almost any time in history, it will still be an excellent time to lock in a great mortgage rate. But as history as taught us, it won’t last forever.

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