When you think about buying a home, interest rates are one of the first things that come to mind. But who decides these rates? And how?
From government agencies to banks, here’s what you need to know about mortgage rates so you can start looking for a new home with confidence.
The Federal Reserve's Role
Often simply called the Fed, The Federal Reserve operates as the United States’ central banking system. The Fed is tasked with keeping our financial system stable, yet flexible, and it has a key role in shaping economic policies and influencing interest rates.
The Federal Funds Rate Explained
To achieve these objectives, the Fed will exercise its control over the federal funds rate
— the interest rate at which banks lend money to each other.
The economy is regularly assessed to determine this interest rate. Based on what the Fed finds, it will decide how to adjust the rate. If the Fed decides the federal funds rate needs to be lowered, it becomes less expensive for banks to borrow from each other. The opposite is true if the Fed decides to raise the rate.
What It Means for Homebuyers
When the federal funds rate changes, it influences interest rates throughout the economy. Banks will respond to the new federal funds rate by either raising or lowering the interest rates they charge people for various loans. This includes things like car loans, personal loans and mortgages.
Understanding these dynamics will help you as you start searching for a home, as the interest rate you secure can be an important factor when making homebuying decisions. Regardless of what the interest rates are when you buy, it’s important to remember the bigger picture. Buying a home is a lifetime investment that can pay off over time, so if you’re in a good financial position, it may still be the right time to start your journey.
Understanding Rate Changes and Predictions
Interest rates are always changing, and while they’re currently higher than normal to help stabilize the economy after the COVID-19 pandemic, 2024 predictions look potentially promising. Many economists expect the Fed to lower interest rates in 2024, which would then lower the interest rate on home loans and reduce monthly payments. But waiting for lower interest rates might not be the best move for you because the prices themselves might increase in the future. And since predictions aren’t a sure thing, there are concrete steps you can take to get ready to buy a home.
Building a Down Payment
No matter what interest rates are right now, saving for a down payment is always a savvy move for aspiring homeowners. The rate you see today may not be the one offered to you when you’re ready to buy a home, so it’s never a bad idea to plan ahead. The sooner you start saving, the more control you’ll have over making your homeownership dreams a reality.
Refinancing for a Lower Rate
One encouraging piece of news for homebuyers is that the interest rate at your time of purchase doesn’t have to be locked in forever. If interest rates go down after you purchase your home and secure a mortgage, it may be possible to refinance for a lower rate.
Refinancing means replacing your current mortgage with a new one, ideally at a lower interest rate. Lowering your interest rate can result in reduced monthly payments and potential long-term savings. With the right timing, you could use improved market conditions to improve your rate and become a financially savvy homeowner.
The Starlight Advantage Program
Are you eager to start your homeownership journey, but not sure about interest rates? The Starlight Advantage Program can help.
If you decide to purchase a home through our program, you may have the opportunity to secure a lower interest rate. Whether it’s a 30-year fixed rate or an adjusted rate with a buydown, we may be able to help you find a rate that works for you and helps you save in the short and long term.
Have more questions about interest rates? No problem! Get in touch with one of our Home Guides and schedule an appointment today.