The Federal Reserve has increased interest rates for the third time this year, a move that shows growing confidence in the state of the economy.
The benchmark federal fund rate is moving up a quarter of a point, from 1.25 to 1.5%. This may not seem like a world-shifting change, but it indicates that the central bank is confident in a national economy that is seeing positive numbers in jobs and economic growth, which has been strong at 3% since the spring.
With pending tax legislation being worked out in Washington, there could be additional stimulus to the 2018 economy, boosting growth even further, which could mean additional increases in the future. Economic forecasts that were released by officials suggest that the rate could be raised three more times on 2018.
Janet Yellen, the Federal Reserve Chair, said that the tax cuts being worked out could provide a modest lift to the economy, and could boost both consumer confidence and business spending.
But what does all this mean to you, the typical homeowner? How does it affect you when you look to refinance or purchase a home? For that matter, how does it affect your overall financial situation?
To find out, let’s take a closer look at the interest rate’s affect a few specific financial aspects…
What Do Fed Interest Rate Changes Mean to the Consumer?
ARM Rates will Increase
While virtually everyone will, in some way, be affected by the rate increase (even if they don’t notice), the people most directly affected will likely be holders of adjustable-rate mortgages (ARM loans). These programs are adjusted annually, so there will likely be a delay in the impact, but it will come. If rates go up another three-quarters of a point, like they did in 2017, monthly payments on a $200,000 ARM could go up over $80.
If you have an ARM on your home, you may want to talk to a qualified professional about refinancing before future interest rates go up even further.
HELOCs May Become More Expensive
We may also see an increase in the price of a Home Equity Line of Credit, or “HELOC.” These programs allow you to use equity in your home to finance a wide range of expenses, and like any loan, they are directly affected by interest rates. A slight increase in interest rates will inevitably make HELOCs more expensive.
If you are a current holder of a fixed-rate mortgage, you have very little to worry about, as the interest rate increase will not hurt your mortgage payment. However, if you are looking for a mortgage in the near future, the interest rates will matter. Despite the Federal Reserve’s past increases, interest rates on fixed-rate mortgages remain relatively low, as factors such as sluggish inflation prospects have kept rates in check. While most buyers are not overly concerned about a quarter of a percentage point on the interest rate of their mortgage, the higher in price you go the more this number will affect you. If you are seeking a home in the multiple-millions, you will want to act faster before interest rates on fixed-rate mortgages go up.
While not a mortgage topic, auto loans could also be affected by the change in interest rates. However, competition among auto lenders could hold interest rates down. Also, auto loans have remained almost unchanged, even through the economic recovery, so it’s likely this trend continues.
Bank Account Savings Rate
Although no one actually plans their retirement based on bank account interest rates, the slight increase in rates could result in a slight increase in returns for money held in your account. Of course, most of these accounts pay a mere 1% or less, but you could see a slight increase in your account or CD rate.
Interest Rates FAQ
There can be a lot of confusion surrounding interest rates, the Federal Reserve, and their connection to mortgage rates. To help you understand the subject, here are a few of the most common questions:
What is the Fed Fund Rate?
The Federal Funds Rate is essentially the rate at which banks lend money to each other on an overnight basis.
Does the federal government control mortgage rates?
No. Mortgage rates are set by many different factors, including ties to U.S. Treasury bonds.
If the Federal Reserve rate goes up .25%, do mortgage rates automatically go up .25%?
No. Wall Street is influenced by decisions made by the Federal Reserve Board, but investors can buy and sell bonds based on their own investing strategy that can be driven by individual research.
When the Federal Reserve Board raises rates, what rates actually go up?
The prime interest rate is directly tied to the Federal Reserve rate, so credit cards, unsecured LOCs, and some installment loans will be affected. Most HELOCs will go up as well.
What factors actually change mortgage rates?
Mortgage rates are like the stock market, in that nobody truly knows or can define what makes it move one way or another. However, there are a few factors that are known to influence mortgage interest rates:
- Bond prices: These are influenced by supply and demand, just like any typical investment.
- U.S. Treasury Bonds: Bonds are considered one of the most secure non-cash investments in the world. In other words, if you want a safe, low-risk (but low gain) place to park your money, US. Treasury Bonds are a top choice. These are the preferred “safe” investment choice for large investors, insurance companies, and foreign governments with surplus cash.
- The economy: The United States economy remains strong, while Europe remains under pressure, driven largely from Brexit, and Asia continues to underperform. The U.S. dollar also remains strong on the world currency market, stabilizing our economy.
Let the Experts at San Diego Purchase Loans be Your Guide
Need help navigating the complex world of mortgages and interest rates? Contact San Diego Purchase Loans and let us help you find the right mortgage for your specific needs.
We’ll thoroughly explain how interest rates will affect your current and future mortgage situation, helping you make the right decision for your needs!