Why Mortgage Rates Aren't Awesome... Yet
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I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. Last week, we talked about the Fed's decision to hike rates and what it means for your wallet. I told you that I would be digging deeper into what a rate cut would mean for potential homebuyers. And here we are. This one's for you, money rehabbers who are dreaming of buying a home and not at insane rates.

As I mentioned last week, mortgage rates have a bit of a complicated relationship with the Fed. But today we're going to untangle that. The Federal Reserve sort of acts like a bank for banks. Your bank holds an account with the Fed. It can lend out some of that money to other banks overnight. When the Fed sets these interest rates, it specifically applies to those short term loans between banks. And that is it.

So if you were hoping that the APR on your credit card would drop, that's not happening. This rate doesn't directly impact what you're personally paying for anything. Think of it this way. The rates the Fed sets mainly affect how banks interact, not your everyday finances. So basically, the Fed lowered the rate that your bank pays to borrow money from other banks.

This change makes it easier for banks to access funds when they need them, which in theory and often in practice enables them to lend more money more readily to consumers and businesses, which is great. That should ultimately lead to lower borrowing costs for you, right?

In a way, yes, it does. But eventually. It is important to understand that the adjustment won't magically make homes more affordable today. The housing market is tough out there right now. I know, say less, Lappin. But let's break this down. We're facing a real shortage of starter homes right now. Housing prices have been climbing. And remember how mortgage rates were super low back in 2020?

Well, on average, home values also skyrocketed about 50% over the last five years. And that's true for all types of houses. So if you own a home that's appreciated by 50%, that might sound amazing. But here's the problem. If you're thinking of selling to up

Guess what? Those bigger, better houses are also 50% more expensive right now. When we talk about the real affordability of a home, price isn't the only factor to consider. Interest rates, of course, play a big role here. If you secured a mortgage in 2021 or earlier, chances are you locked in a great rate or had the chance to refinance at an even better one. In fact, nearly 60% of homeowners enjoy rates below 4% right now.

And I'm jelly. So what is the impact of this? Many homeowners are now facing a big dilemma. They have these incredibly low mortgage rates, but they're eyeing homes that are often double what they thought they would spend. This understandably makes them hesitant to move, which means fewer homes are hitting the market. The result, prices continue to climb.

So between the fact that prices are climbing and rates are even higher than that tempting 4%, potential sellers are in a bit of a tough spot. But something that would tempt homeowners to put their houses on the market would be competitive interest rates. So will a Fed rate cut help bring mortgages down? Well, it already has. This gets at how the Fed rate cut affects mortgage rates, which actually starts even before the actual rate cut happens.

When the Fed started hinting at a rate cut, banks responded by lowering rates a bit. The Fed knows that financial markets prefer predictability and dislike sudden change. So to keep things smooth, they often signal their plans ahead of time. So when J-PAL started dropping hints, it resulted in a pretty steady decline in mortgage rates over the past four months.

They could drop even more, but that's still up in the air. Keep in mind, though, it works like a seesaw. As interest rates go down, home prices start climbing up again because more buyers could feel encouraged to dive into the mortgage market at these rates. But forget about home prices for a second. Let's once and for all answer this question. If the Fed put interest rates at 4.75%,

Why the heck is 4.75% not the average mortgage rate right now? Well, even though banks are charging each other 4.75% for overnight loans, they typically charge their customers more than that. And that's something that's called the prime rate. This rate is usually about 300 basis points or 3% higher than the Fed funds rate, though it can vary.

Banks basically start with the Fed funds rate and then factor in broader market conditions to set their prime rate. Right now, the prime rate is hovering around 8%. If you have or have been thinking about an adjustable rate mortgage, this prime number is a really important number for you. Changes in the prime rate will influence your mortgage rate, though not often by the same number of basis points. So if the prime rate moves up or down, expect your adjustable rate mortgage to follow suit, directionally speaking.

If you don't have an adjustable rate mortgage, think of the prime rate as the second step in the journey that begins with the Fed funds rate and eventually leads to your personal mortgage rate, which is admittedly many steps down the road. Banks consider the prime rate along with the housing market and the economy when determining mortgage rates, kind of like an overall vibe check.

A key part of this vibe check is looking at the 10-year Treasury bond market. Why that specific bond? Well, investors who are interested in making a nice, safe, long-term commitment are happy to settle down with either a nice 10-year federal bond or to settle down with a nice long-term property-backed loan. So as interest rates on bonds go up, the interest rate on mortgage climbs as well to attract the same kinds of investors.

The rates are not the same because that would be too easy. Mortgage rates are usually two to three percentage points higher, but they have moved up and down together for more than 50 years. So there's a few different numbers that go into solving the average mortgage rate, but we still haven't landed on your personal mortgage rate yet.

The rate that you get at signing might not reflect the national average. It could be higher depending on your credit score, how much of a down payment you could make, and the length of your loan. There's definitely a magic formula to snagging the best rate. It's not necessarily simple, but it is out there.

To set yourself up for maximum success, make sure your credit score is in tip-top shape, save for the largest down payment you can manage, and consider going for a 15-year loan instead of a 30-year loan. It will save you a ton of money in the long run.

Sure, the housing market isn't that awesome right now. But by opting for that shorter loan, putting down a larger payment, and maintaining a solid credit score, you're paving the best path forward for buying your house, even if the Fed's lashing rates doesn't magically lower your mortgage rate.

For today's tip, you can take straight to the bank. When we chat about mortgage rates, you'll often hear the term discount points or simply points. So what are they? Well, points are essentially 1% of your loan amount. If you pay this fee upfront to your lender, they'll lower your interest rate. It's really important to note that this is a fee and not part of your loan, which means it's only a smart move if you plan on staying in that home for more than five years. If you're thinking at all about moving in less than three years, you probably won't save enough to justify the cost.

However, if you envision yourself in that home forever and ever at the end, it's usually well worth it. Money rehabbers, we know all too well that financial worries can pop up at any time. Am I planning for retirement properly? Am I taking advantage of every tax deduction I possibly can be? I mean, the list goes on and on. What you need is a place you can quickly turn to for financial advice or a second opinion. And that's Money Pickle.

Money Pickle matches you with a trusted, vetted financial advisor based on your specific financial situation and goals. Then you can set up a free video meeting or a phone call to discuss your questions whenever it's convenient for you. No need for an in-person meeting. The best part about Money Pickle is that it does all the vetting for you. They have thoroughly vetted every single one of their advisors to make sure they have a

clean history with their current and past clients, which is really important. A series 65 series 66 and or CFP certifications to ensure they're well equipped with all the knowledge and ethical standards you need. And if you really like your financial advisor, you can hire them outside of Money Pickle to be your financial advisor moving forward. But there is never any obligation to do so. So honestly, there's nothing to lose.

Don't wait for those important financial questions to finally get answered. Head to Money Pickle now and schedule a free meeting to figure out your financial next steps. Go to moneypickle.com slash MNN. That's moneypickle.com slash MNN. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Levoy. Our researcher is Emily Holmes.

Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at moneynews and TikTok at moneynewsnetwork for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.

Toyota has been building a legacy of excellence for years. From developing hybrid technology to upping the standards of safety and efficiency, Toyota is always innovating, always making progress. And with Toyota's superior lineup of SUVs in stock at your local Toyota dealer, you can experience the legacy for yourself.

So check out an adventure-ready RAV4 designed to be the perfect mix of style, practicality, and go-anywhere attitude. Or test drive a capable and affordable Corolla Cross with the style, space, and available tech to keep you cool and connected. And both RAV4 and Corolla Cross are available with all-wheel drive, giving you the freedom to roam. Quality, reliability, efficiency. That's the legacy of Toyota.

Visit buyatoyota.com, the official website for deals, to find out more. Toyota, let's go places.