It’s a common misconception that the Fed rates determine consumer mortgage rates. Reality check: Mortgage rates are actually made on Wall Street. You can’t avoid the hike, but being proactive about it may impact you is the best thing you can do. Here are a few things to note.
Mortgage Rates COULD Drop
The Fed does not control mortgage rates. However, the Fed Funds Rate is correlated to prime rate, which impacts bank lending. Bank lending in turn influences consumer loans, which can impact you.
If we take a look at the 2015 increase, you will see that mortgage rates actually dropped. If you look even further back over the last two decades at the average 30 year-fixed mortgage rate, you will see no determined correlations. Case in Point: The Fed Reserve can possibly affect today’s mortgage rates, but it does not set them.
Inflation = Higher Mortgage Rates
Although the Fed does not directly decide our mortgage fate, the rate choices they make do give economic guidance to markets. If that guidance leads to inflation, you can expect higher mortgage rates. Why? MBS (mortgage-backed securities) depend on the value of the US dollar. When inflation occurs, the cost of the dollar goes up, causing mortgage bonds to drop, leading to higher mortgage rates.
Higher Interest Rates Could Be Passed to You
When the Fed raises interest rates, banks are faced with higher borrowing costs. Higher borrowing costs results in higher interest rates for you. As interest rates rise, it gets harder to pay down debt. One way to combat rising interest rates is to be cognizant about your credit utilization. Remember, the higher the interest, the more you end up paying in the long run.
ARM’s May Follow Suit
An adjustable rate mortgage, or ARM, is a mortgage loan that has a fluctuating interest rate. Typically ARMs have an initial fixed rate, but after a certain period of time the monthly payments can move up and down as interest rates change. If you have an ARM, now may be the time to consider exploring a fixed rate mortgage to lock in a rate.
There are a lot of unknowns with the changes being made, but one thing is for certain- we're here as resource to help you make sound financial decisions when it comes to your home loan options. Unanswered questions? We're here for you. Get matched with a loan officer to get one on one guidance today.