The Federal Reserve Has Finally Raised Rates-Now What?

The Fed just raised rates:  Here’s what it means for real estateThe Federal Reserve raised the fed funds rate

The Federal Reserve finally increased the federal funds rate-a key benchmark rate that affects interest rates on consumer and business loans. In an effort to boost the struggling economy, it’s been at or near zero for seven years. The last time the Fed actually increased the rate was almost a decade ago, in January 2006.

The hike ushers in a new era for the Federal Reserve, which has said it will increase rates gradually to ensure that economic growth isn’t compromised. Here are some ways you may feel the effects of the Fed’s new policy direction:

1. Buying or refinancing a house
Anyone that has an adjustable-rate mortgages should know their rate (and thus monthly payment) is rising a bit. This loan will react quickly to any rise in the fed funds rates. That’s because the rates on ARMs typically are tied to the prime rate or LIBOR, both of which are tied to the Fed rate.

But rates on the most common type of mortgage — the 30-year fixed — will rise gradually. Since that rate follows the yield on the 10-year Treasury note, it usually moves in the same general direction as the fed funds rate, but not in lockstep. The same goes for the 15-year fixed home loan, a popular choice for those that can afford a higher monthly payment.

Consistent rate hikes over time by the Fed could eventually price some buyers out of the housing market. So how much of a difference does a .25% interest rate increase make in a monthly mortgage payment? On a $400,000 loan, it adds about $58/month to the payment. Not bad, but one can see how this starts adding up with further rate increases down the road. See the chart below. For a mortgage calculator, go HERE

effect of mortgage rates on monthly payment2. Borrowing from your house
Rates on existing home equity loans are fixed, so they won’t be affected by a rate hike. But if you’re shopping for a new equity loan, you will see rates track the increase of the 10-year Treasury yield, which follows the direction of the fed rate, but at a slower pace.

If you have a home equity line of credit, or HELOC, your rate is rising. Most HELOCs track the prime rate, which is also tied to the increased fed funds rate. The increase will be almost immediately, taking effect within 30 days. To help yourself, see if your lender will fix the interest rate on the amount you have already borrowed on the HELOC. The rate increase would then only affect any future borrowing.

3. Other Effects

Credit cardsMost interest rates on credit cards are variable and are often tied to the prime rate. Your rate will thus increase on purchases made after the increase.

Student loansMany private student loans have variable rates, many of which are tied to the prime rate. When the Fed raises rates, the prime rate also goes, increasing your monthly payment.

Auto loansThere’s no direct correlation between the fed funds rate and auto loan rates, but they will eventually follow the general interest-rate environment,

Saving accounts-There’s good news for savers! Rates on certificates of deposits (CDs), money market accounts, and savings accounts are highly correlated with the fed funds rate and move closely with it. If the Fed raises rates, that means better returns for savers.

 

For more information on this topic:

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Ryan@RyanYourRealtor.com
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