How a Fed rate hike can affect mortgages — and affordable lenders to help you save

There’s more disappointing news for home shoppers who were hoping this would be the year of the sub-6% mortgage rate: At 6.43% during the week ending July 2, rates are probably the lowest they’ll get through the New Year.

The average 30-year fixed mortgage rate will likely remain between 6.50% and 6.70% until 2027, Joel Berner, a senior economist at Realtor.com, told CNBC Select. 

Berner’s forecast is based on the Bank of America Global Research’s prediction, released on June 22, that the Federal Reserve will hike interest rates by 0.25 in September, October and November.

BofA pointed to higher-than-anticipated inflation — largely due to the oil crisis sparked by the Iran war and the closure of the Strait of Hormuz — as the reason for the projected increase. It’s a radical shift from the bank’s prediction six months ago that the Fed would cut rates this year.

While this likely isn’t the news home shoppers were hoping for, it may push people waiting to buy off the sidelines because it provides some clarity after months of uncertainty, Berner said.

“I think we’re in, for now at least, a steady landing zone, and this is really what I think the market has been waiting for, because there’s been so much seesaw activity and rates this year up to this point,” Berner added.

Below, Select dives into how the Federal Funds Rate relates to mortgage rates, what current expectations mean for homebuyers and the lenders that offer lower-than-average rates. 

To answer this question, let’s start with the basics: what the FFR is, why it’s used, and what it does. Then we can go into its relationship with mortgage rates. 

What is the FFR and how does it work? 

The Federal Funds Rate is the target interest rate set by the Federal Open Market Committee. It dictates the rate at which commercial banks lend and borrow their excess reserves to each other overnight. These financial institutions pass the cost on to the everyday consumer, so the lower the rate, the less they charge consumers for debt, and the higher the rate, the more they charge. 

Does the FFR impact mortgage rates? 

While the Federal Fund Rate steers the cost of short-term debt, like credit card balances and personal loans, the 10-year Treasury Yield — driven by financial markets rather than a regulatory body — guides the rates for long-term debt, like mortgages. 

The FFR does not dictate how the 10-year Treasury Yield moves, but it is a factor with a large influence. Additionally, supply and demand, geopolitical events, inflation, job growth and unemployment all play a role in where the rate goes. 

What do multiple consecutive FFR increases do to mortgage rates? 

Multiple hikes over a short period likely won’t impact mortgage rates unless they are not anticipated, Berner said. If the prediction for a trio of increases does come to fruition, we can be relatively sure that we’re at the lowest point we will be at for the rest of the year, he said. 

“I think that if we are going to see hikes for the remainder of the year, this kind of 6.5% mortgage rate might be the floor,” Berner added. 

Berner told CNBC Select that timing the market is a fool’s errand.

“There’s just so many things that can move against you, and waiting on mortgage rates to be perfect is just not a game that’s going to go your way a majority of the time,” Berner said. “So I think take advantage of this period of stability, make your budget around a 6.5% mortgage rate, because that’s probably where we’re going to be for the time being, and just see what it is you can afford.”

If it’s the right time for you to buy a home despite the current environment, there are things you can do to get a better rate. One of the biggest factors is your lender — some consistently offer lower-than-average rates that can help you get the best deal. 

Try a credit union

Credit unions are one such type of lender with lower-than-average rates. That’s because these institutions are member-owned, meaning any profits they make go back into products for union members. 

At CNBC Select, we think FourLeaf Federal Credit Union is a great option for shoppers. Unlike many credit unions that have relatively restrictive membership guidelines, FourLeaf Federal has a simple requirement: Open a savings account and deposit $5. 

Additionally, we like that FourLeaf offers a free rate lock for 60 days, so if rates go up, you’ll be able to keep the one you have when you applied. Plus, it has 5,000 credit union branches nationwide, so you can deal with your mortgage online or in person. 

Consider an online-only lender 

Online-only lenders, like Better Mortgage, also tend to have lower-than-average rates. What’s more, Better Mortgage is speedy — its time to close averages 19 days, about half of the national average. Lastly, if it can’t match a lower rate you got elsewhere, it will give you $100.

Go with an FHA loan 

FHA loans are backed by the Federal Housing Administration and funded through private lenders. They boast lower rates than conventional mortgages and are available to Americans with a 580 credit score or higher. Plus, you can put as little as 3.5% down. 

Rocket Mortgage is one of the largest FHA loan lenders in the country. It also has one of the best customer service records: it received an A+ from the Better Business Bureau and frequently tops the J.D. Power customer satisfaction lists. Its time-to-close is also quick, at 22 days, nearly half the average time.

Why trust CNBC Select?

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed financial decisions. Every mortgage article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of the products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.