How mortgage rates will be affected by the interest rate pause

Despite an unexpected uptick in inflation that occurred in late 2023, the Federal Reserve announced today that it would leave interest rates unchanged for now. This is the fourth consecutive rate hike pause by the Fed — keeping its benchmark rate range at a 23-year high of between 5.25% and 5.50%. 

"The committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%," the Fed said in its statement.

While many were hopeful that the Fed would decrease its benchmark rate during its first meeting of 2024, the rate hike pause is still good news for borrowers who have been facing elevated borrowing costs on everything from credit cards to personal loans. But what exactly does today's rate hike pause mean for mortgage rates — and potential homebuyers — in particular?

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How mortgage rates will be affected by the interest rate pause

It's important to note that the Federal Reserve doesn't directly set rates for mortgages or other lending products. However, the Fed's benchmark rate does play a role in determining the interest rates banks and lending institutions charge on lending products — and that includes mortgage loans. 

For example, as the Fed raised its benchmark rate to try and temper inflation over the last two years, the interest rates on credit cards, personal loans and home equity loans skyrocketed in tandem. That resulted in mortgage rates climbing from about 3% in 2020 and 2021 to where they are currently, at just under 7%. 

And, we can expect a similar trend to occur with today's rate hike pause. The Fed's benchmark rate will remain steady for now and mortgage rates are likely to do the same. 

It can still make sense to lock in your mortgage rate now, though. 

While rates are temporarily paused, the Federal Reserve is still working toward its target inflation goal of 2%. And, if the inflation rate ticks up higher in the future, there could be another rate hike on the horizon. 

If that happens, mortgage rates are likely to increase again as well. But if you lock in your mortgage rate now and purchase your dream home, you'll be protected from the impact that future rate hikes could have on your home buying goals. 

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How to find the best mortgage rate in today's economy

While today's rate pause probably won't result in drastically lower mortgage rates, there are a few strategies you can use to ensure that you get the best mortgage rate possible right now. These include: 

• Research and compare: Conduct thorough research on various lenders and mortgage products. For example, you can explore different types of mortgages, including fixed-rate and adjustable-rate options. Compare interest rates, terms and fees to identify the most favorable options for your financial situation.
• Improve your credit score: A higher credit score often translates to lower interest rates. Before applying for a mortgage, take steps to improve your credit score by paying off outstanding debts and addressing any inaccuracies on your credit report.
• Save for a larger down payment: A larger down payment can result in a lower loan-to-value (LTV) ratio, making you a more attractive borrower to lenders. This may also lead to better interest rates and terms.
• Consider mortgage points: Mortgage points allow you to prepay interest upfront in exchange for a lower interest rate over the life of the loan. Evaluate whether paying points makes financial sense based on your plans and how long you intend to stay in the home.
• Shop around for quotes: Obtain mortgage quotes from multiple lenders. Don't hesitate to negotiate and inquire about available discounts or promotions, either, as lenders may offer incentives to secure your business.

The bottom line

While today's Fed rate pause may not be a game-changer for those in the housing market, it does offer a period of stability, which is a modest victory in today's economic climate. Homebuyers who are comfortable with current rates may feel comfortable proceeding with their plans, while those concerned about potential rate hikes have a brief window of relief.

That said, navigating the mortgage market in the current economy requires a proactive approach. By following the tips outlined above, you can take advantage of the momentary stability presented by the Fed's pause to purchase the home of your dreams with the lowest mortgage rate possible.