What Rising Federal Interest Rates Mean for Your Home
On Wednesday, the Federal Reserve raised its benchmark interest rate for the seventh time in two years, signaling continued economic growth and a low unemployment rate. While that might just sound like financial mumbo-jumbo, it could have serious effects on what you pay for your home in the near-future.
The benchmark interest, or prime, rate is basically the minimum rate that non-Treasury lenders (a.k.a. your mortgage lender) can supply borrowers (with fees—known as “spread”—that go to lenders in the form of profit). So when the federal benchmark goes up, banks will hike up the rates for those loans with adjustable rates, too, in order to keep their profit as high as possible.
The increase is the second this year with possibly two more to come. The most recent bump brings the Fed’s benchmark rate to a 1.75% to 2% range. This is the highest it’s been since summer 2008, before the recession. Officials expect rates to continue rising: a range of 2.25 to 2.5% is possible by the end of 2018. Despite a historically low unemployment rate—currently 3.8%—and rising interest rates, employment wages have not increased significantly. These factors could signal an overheating economy, but Fed Chairman Jerome H. Powell predicts wages will normalize to accommodate inflation.
Now that you know what is happening and why, here’s how it affects you: Do you (or are you looking to) have a mortgage? Is this a fixed-rate or an adjustable-rate mortgage (ARM)?
If you already have a fixed-rate mortgage, you can rest easy: Since you’re locked into a rate for the length of the loan, these short-term increases won’t affect you. The mortgage rate you secured probably already accounted for how the economy would grow over the 30-year period. You opted for a higher rate at the outset (and lost out on the potential savings that could come with an ARM) in exchange for the security of knowing your monthly payment for the next 30 years.
While they’re not tied to the benchmark rate, fixed-rate mortgage are tied to 10-year Treasury notes, and when one goes up, it’s likely that the other will, too. For those looking to get a fixed-rate mortgage, this federal increase means that you might want to hurry if you want to get the best deal. 30-year fixed rate mortgage rates have been quickly increasing—in 2015, the average rate was 3.85 percent, according to SmartAsset, where it’s now 4.61 percent. To put some numbers to it, a $200,000 30-year fixed-rate mortgage secured when the interest rate was 3.85% would mean a $938 monthly payment and a total payoff amount of $337,542. The same loan at the newly announced 4.61 percentage rate means a $1,026 monthly payment and a total mortgage cost of $369,534.
If you already have an adjustable-rate mortgages or home-equity line of credit (or HELOC), you’re going to feel this interest bump somewhat soon. Both of these “adjustable” rates are tied to the federal benchmark rates, so they’re subject to steep rate rises as the economy grows. According to SmartAsset, the current rate on a 5/1 ARM is 4.01 percent, compared with 2.94 percent in 2015. There has already been a increase of 0.14 percentage points within the past week because of the announcement.
If you’re past the fixed-rate period on your ARM, expect to see your payment increase within the next year (dependent on when your mortgage readjusts). But if you have a HELOC, expect to see the change in the next few billing periods since they readjust quickly. A quarter point increase in federal interest rates means a quarter point increase in your payment.
With promise of increasing interest rates, experts advise those with ARMs and HELOCs to refinance into fixed-rate mortgages as soon as possible.
The bottom line: Interest rates are going to continue to rise in the coming months and real estate prices don’t seem to be coming down. The good news is that experts predict more homes are going to hit the market and housing development will finally pick up again, hopefully slowing the rising prices. If you’re thinking of buying a home in the next couple of months and you have the money to do it, you might want to lock in a rate now before they rise again.