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I know that Fed doesn't set mortgage rates directly, but they usually follow Fed's policy. My question is: How soon do mortgage rates go up after Fed's rate hikes, and do Fed rate hikes affect all mortgage products (10, 15, 30-year terms; both fixed and ARM), or only some (like only 30 years, for example)?

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Banks change loan interest rates whenever they decide to change them, driven by two opposing factors: the need to make a reasonable profit, and the need to not lose too many customers to other banks.

Generally, what this means is that each bank wants a certain minimum amount over the prime rate, but is held fairly close to that minimum. Note that the minimum may reflect how much they trust that the loan will be repaid; it is possible for credit rating to affect interest rate as well as whether you can get the loan at all.

But there is no specified time at which the rate changes unless it is specifically advertised as some percentage over prime (in which case it probably happens immediately).

If you expect the rate to change, many banks will let you "lock" the rate on a loan application for some number of weeks.That protects you if they increase rates during that period.

This is generally true for all new loans, not just mortgages.

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    Exactly. The “Fed rate” is the bank’s expense, while the mortgage rate is their “sale price” to you. Like with all other businesses, they are not strictly related.
    – RonJohn
    Feb 2, 2023 at 20:16
  • Do you think the mortgage rates (especially 10- and 15-year ones) will go up or down in February-March? Feb 2, 2023 at 21:52
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    I think they are likely to go up or down, yes. I am not about to try to guess which, and they may not move at all.
    – keshlam
    Feb 2, 2023 at 23:06
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You may not see a change in mortgage rates just because the Fed increases its borrowing rates.

Base Mortgage (i.e. 30-year) rates are set by the overall debt market which buys and sells government debt based on expected future interest rates. So in a sense, the recent rate hike was possibly already included in the 30-year Government rate. That rate would only go up or down if the actual rate change was different than market expectations.

Retail Mortgage rates are based off of this base rate plus a spread to account for risk of default (e.g. higher-risk consumers get higher rates) and to generate a profit for the bank.

Another layer that's in play with mortgage rates is the Mortgage Bond (Structured Debt, MBS, etc.) market. That's basically the marketplace where investors buy and sell existing mortgages. The prices that investors pay for those bonds can also have an impact on retail mortgage rates.

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    "That rate would only go up or down if the actual rate change was different than market expectations." Even if there is something of a market 'consensus' on the direction of future price changes, and the price change is as expected, you should still expect some fluctuation in fixed market rates, all else being equal. This is because there will never be 100% agreement on future events, and if it is expected there is a 95% chance that rates will rise by 25 basis points, then that only 'prices in' 95% of the rise, and when a rise of 25 BP's happens the remaining 5% would be pried in [simplified]. Feb 2, 2023 at 17:32
  • True, and that would be "more than the market expects". If the average market expectation is a rise of X (e.g. half think if will rise X-Y and half think it will rise X+Y) and it in fact rises X, then the net effect should be minimal. I was more refuting the assumption that a rise in fed rates guarantees a rise in mortgage rates.
    – D Stanley
    Feb 2, 2023 at 17:43
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    My point is that the market expectation is almost always an average of various possible outcomes. The Expected Value will therefore typically be some result that is on its own not possible - like an expected rate increase of 24 basis points, which is close to 25 but modulated by some pessimism in the outcome that expects a chance at 0 basis points. Feb 2, 2023 at 20:25
  • Do you think the mortgage rates (especially 10- and 15-year ones) will go up or down in February-March? Feb 2, 2023 at 21:52
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    @InfiniteLoop I have no clue...
    – D Stanley
    Feb 2, 2023 at 21:58

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