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How Does the Federal Reserve Affect My Mortgage Rate?

Many hopeful buyers fear they may have missed out on their dream home — or they dread suffering feelings of regret once they do buy a house.

While the Chicagoland market remains challenging heading into 2024, new changes in policy and conventional wisdom mean this could indeed be your year to overcome your fears and become a homeowner

Embarking on the journey to purchasing a home means encountering a sea of considerations, and how much your mortgage will cost is a major one. Your specific mortgage rate depends on a variety of factors, indirectly influenced, but not directly tied to, the interest rates set by the Federal Reserve. 

Let’s zoom in on recent interest rate news and how it could impact your potential future as a homeowner.

Understanding the Signals

The Federal Reserve System is the central bank of the United States, supervising and regulating our financial institutions and promoting stability. One of the Fed’s main functions is to set the federal funds rate to balance the various forces at play in the economic landscape and the nation’s housing market. 

This rate is the benchmark for how much banks and other financial institutions charge each other for loans, and when it’s high, it’s more expensive for them to operate, and those costs trickle down to consumers via charging more interest for home and car loans. 

So, while the Federal Reserve doesn’t dictate mortgage rates, the two are closely linked. 

If you’re a current homeowner who bought in 2020 or 2021, you might be reluctant to sell and lose your historically low interest rate. If you’re scrolling through Zillow and Redfin and eager to house-hunt, then seeing rising asking prices, low inventory, and the lingering specter of mortgage rates reaching over 7%, you may think owning a home is still out of your reach. 

The good news is that we’re definitely coming down from the peaks of 2023, and the Fed has hinted that rates are likely to come down even more in the months to come. 

With the presidential election looming in the fall, many Americans are worried about inflation. A recent report showed higher rent, food, and energy costs are making life more difficult, especially for those trying to save money to buy a house.  

However, partnering with an innovative and forward-thinking mortgage lender can help you explore your options and discover a path to homeownership that works with your specific circumstances. 

Elements to Consider

If you’re interested in building equity, creating a more stable life, and escaping the whims of Chicagoland landlords, it’s crucial to do your due diligence and stay on top of trends in your target market

A savvy real estate team can provide invaluable local knowledge and resources, as well as provide insight into housing and financing choices you may not have thought about, such as government-backed mortgages, multi-unit properties, condominiums, cooperatives, and tiny homes. 

There are also moves you can make to help you qualify for a lower mortgage interest rate. Probably the most important is to improve your credit score. Lenders give the best terms to those who can prove, via that little 3-digit number, that they’re a low risk and more likely to repay their loan on time.  

It’s vital to ensure that all of your financial documentation ducks are in a row. To qualify for the most advantageous rates (and expedite the mortgage loan process), you should assemble your personal paper trail, including proof of:

  • All current income 
  • Employment history (for the past two years)
  • Bank statements (for the past two months)
  • Retirement and investment accounts
  • Outstanding debts such as credit cards, automobiles, medical bills, or student loans
  • Rental history
  • Down payment or gift funds

If you’re wondering whether it’s best to wait it out, evaluate your current situation. How urgent is your need to buy? How stable is your living arrangement? Is your family growing or career status changing soon? How much are you affected by the limited inventory? Determining the answers to these questions can help you make the most informed decision.  

It’s All About Strategic Timing

Being prepared, doing the research, and seeking assistance from local real estate industry experts will help you find the homebuying success you deserve. 

Economists can’t agree on when the Fed might cut interest rates, but lower rates translate to increasing affordability and accessibility for Chicagoland residents. The latest increase in mortgage loan limits could also be a boon to hopeful buyers.

This could be your moment to seize the opportunity to turn your homeownership dreams into a reality. I can be your guide through the complex but rewarding process of finding the perfect property where you can build a home. Let’s start the conversation — reach out to me today!


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