Why the fed rate hike
is important for home owners and home buyers
is important for home owners and home buyers
Photo Credit CNN Money
I talk about rates in my monthly newsletter because it's a piece of the economic puzzle that has a real impact on my clients. I've found there are two main types of consumers when it comes to information like this - those who can't get enough data, and those who want me to sum it up. So here's the short version and some resources for further learning. What's going on?
The Federal Funds Rate is a benchmark number in financial markets. It pertains to how much it costs banks to lend and borrow money. The rate is determined by the central banking system of the US, the Federal Reserve System (aka "The Fed"). For the first time since lowering it nearly 10 years ago during the recession The Fed has increased that rate. It is a small change that was expected, and is seen by many as a vote of confidence in the US economy.
Home Owners:
If you have an adjustable rate mortgage or a home equity line of credit with an adjustable rate, it will likely have a higher rate at your next adjustment.
Home Buyers:
Mortgage rates are not predicted to shoot up, but they are almost certain to start increasing now. An increase of half a percentage point for 30 year fixed mortgages is anticipated by the end of 2016.
To demonstrate how even a small change can effect your bottom line take the example given by Michael Fratantoni, chief economist of the Mortgage Bankers Association, consider a $200,000 home with a 4% fixed interest rate. Change the rate to 4.25% and your payments go up by $30 a month, potentially adding another $11,000 over the life of the loan. This can also effect the debt to income ratio for a potential home buyer. A recent analysis by the National Association of Realtors found that an increase of half a percentage point to the 30 year fixed rate mortgage (as some economists are predicting will take place by the end of 2016) could result in as many as 7% of potential borrowers not being approved simply because of the rate hike.
Everyone:
Credit cards have variable rates which are directly impacted by the rate set by the Fed. This 0.25 increase is relatively small so you shouldn't see this impact your budget much, but as the rate climbs so will your credit card bill.
Savings accounts can look forward to increased returns in the near future. Though some major banks including JP Morgan Chase, Bank of America and Wells Fargo have already increased their prime rate on the money they lend in accordance with this news, they have not yet made any adjustments to their rates for savers. That change is widely expected to come.
Bottom line: things are changing - they are changing slowly - and all of these rates are still at historic lows. If you carry credit card debt that is now getting more expensive, and if you were waiting for rates to fall lower before making a home purchase than you should probably start evaluating that strategy :)
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