Mortgage rates fall to three-year low as Fed’s path becomes murkier

Mortgage rates dropped this week to their lowest level in more than three years while the Federal Reserve postponed its decision to increase short-term rates until — maybe — sometime later this year.

The Fed left its benchmark federal funds rate unchanged in a range of 0.25 percent to 0.50 percent.

Instead of hinting at a rate increase “in the coming months,” the monetary policy statement said the federal funds rate was likely to remain low “for some time,” though the path will depend on the economic outlook.

The Fed noted that job gains had slowed, despite continued growth in economic activity and household spending. The housing sector continued to improve and the import/export balance was healthier, but business investment had been soft and inflation expectations were still lower than the Fed’s objective.

Mortgage rates this week

■ The benchmark 30-year fixed-rate mortgage fell to 3.69 percent from 3.74 percent, according to Bankrate’s survey of large lenders.

A year ago, it was 4.13 percent. Four weeks ago, the rate was 3.76 percent.

This is the lowest level for the 30-year fixed since Bankrate’s survey on May 8, 2013, when it stood at 3.6 percent. Just five weeks after that, the rate was 4.14 percent, which demonstrates how volatile interest rates can be.

The mortgages in this week’s survey had an average total of 0.19 discount and origination points. Over the past 52 weeks, the 30-year fixed has averaged 3.96 percent. This week’s rate is 0.27 percentage points lower than the 52-week average.

■ The benchmark 15-year fixed-rate mortgage fell to 2.94 percent from 3 percent.

■ The benchmark 5/1 adjustable-rate mortgage fell to 3.05 percent from 3.13 percent.

■ The benchmark 30-year fixed-rate jumbo mortgage fell to 3.67 percent from 3.71 percent.

Other factors affect rates

The Fed doesn’t operate in isolation.

Rather, financial markets are global, says James Lee, senior principal at Kensington Realty Advisors, areal estate investment advisory firm in Chicago, and 2016 chair of the Counselors of Real Estate, a realty brokers’ organization.

“We can’t just look to the Fed and see what they’re going to do,” Lee says. “They have to look globally as to how they’re going to make their moves.”

What’s more, rates aren’t solely a function of the Fed or global markets. Lenders — and the margins, or spreads, they add to their underlying cost of capital — also determine mortgage rates.

And lenders can move rates higher, even if the Fed does nothing.

“If the spread lenders are charging goes from, say, 2.5 percent to 3.5 percent, that’s going to have a big impact,” Lee says.

Lenders might increase their margins as regulators pressure them to curtail real estate lending while demand from borrowers is still strong.

“If regulators are trying to encourage banks to make more, say, business loans instead of real estate loans,” Lee says, “they can charge more interest because the demand is still there from those who are trying to get the money.”