If the fed interest rate is 3.75-4%, why is the average mortgage rate above 7% and most savings accounts are below 3%?
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Mortgage rates are tied to the Fed rate plus about 3-ish. So if the rates are zero, a mortgage is around 3%. When rates are 4, mortgage are around 7%. Why is it 3 points? That’s where competition in the market has settled around at. If a bank charged 4-5 points over Fed rate, they would lose business to competitors, and if they charged 1-2 points over it wouldn’t be enough profit to justify the risk. So the market settled around that 3-ish number
As for interest rates, thing of the Fed rate as how much the banks have to pay to borrow money. If they can borrow from the federal reserve and pay 4%, why would they pay you more to borrow money from you? They will pay you less because you are not as solid a lender as the Fed.
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