We often are asked by Minnesota Veterans “what’s happening with VA loan rates?”In fact, now that we at VALoansMN are spreading our services nationwide we find that’s a common question in every state. There’s so much written and broadcast about interest rates and most of it is, well, irrelevant to mortgage interest rates. You’ll hear a lot of interest rate talk this week. Here’s why.
The Fed’s Open Market Committee is meeting this week. They’ll make an announcement Tuesday afternoon on their plans for the Federal Funds Rate. I can’t tell you the number of calls I’ve received when the Fed moves on that rate. Many people think up or down movement in that rate means mortgage rates (or other loan rates) move in concert. That is not true. There’s a common misunderstanding that the Fed adjusts the Prime Rate. They don’t. Let’s take a walk in the weeds so you’ll have a better understanding of interest rates set by the Fed and what it means to VA Loan rates.
The Fed controls only one interest rate; the Federal Funds rate. That’s the rate banks lend to each other. It’s a very short term rate. Right now that rate is near zero percent. It is not the Prime Rate. The Federal Funds rate usually impacts the Prime Rate but not always. The Prime Rate has almost nothing to do with mortgage rates, car loan rates or credit card rates. It is but one small factor in a very complex formula that each lender establishes when they set consumer loan rates. So when you hear the Fed has left rates alone, or raised or lowered rates, it doesn’t mean VA Loan and other mortgage rates are doing the same.
We at VALoansMN believe mortgage rates are set to rise. Just when and how much is not known. We also believe the Fed is set to start raising the Fed Funds Rate. But what we want to see this week are notes from the meeting of the Fed 6 weeks ago (they always release their notes at the next meeting). There’s some very subtle changes to look for. For the past year the Fed has been saying the current economic outlook is reason enough to keep the Fed Funds Rate low for an “extended period”. Now, if notes of the Fed’s meeting drops that “extended period” language, that is a signal that inflation may be raising it’s ugly head and rates may be moving up. We don’t expect that from the Fed meeting 6 weeks ago but mark your calendar six weeks from now and wait to see if the “extended period” language shows up from this week’s meeting. Okay, so I indicated above that this Federal Funds rate has little to do with VA and other mortgage loan rates. So what’s the big deal and what is happening with VA Loan rates?
If the Fed sees inflation becoming an issue so too do traders of mortgage backed securities (MBS). If these traders think we’re entering an inflationary period then that means mortgages financed at 5% are not going to be profitable as an investment. Right now in the U.S. inflation is running a smidgen over 2.6%. That means an investor in mortgages with rates at 5% are making about 2.5% on their money. But if inflation rises the return on mortgage investments diminishes. To attract buyers to MBS mortgage rates have to rise, and they will. Let’s say investors need 2.5% return to buy MBS. If inflation rises to 4, 5 or 6% then you do the math and you can see what would have to happen to mortgage rates.
So, while the Federal Reserve doesn’t control mortgage rates they can signal to the market what they believe is happening with inflation in the economy and that signals to mortgage investors what to expect. Watch these Fed notes closely and you too will have a clearer picture of what might be happening to VA Loan and other mortgage rates.
