It’s all over the news, Fed just raised rates for the first time since 2006. The Fed approved a quarter-point increase in its target funds rate and pledged a slow pace of increases. How will this affect the home buyer?
Federal funds rate and mortgage rate
Fed’s rate is the interest rate at which depository institutions like banks and credit unions lends funds maintained at the Federal Reserve to another depository institution overnight. It is one of the most influential interest rates in the country because it has bearing on key aspects of the broad economy including housing, employment, growth, and inflation.
When the Fed’s rate rises, so do interest rates of all kinds of other consumer loans, including mortgages. The increase in the short-term rates controlled by the Fed could push up yields on the long-term bonds used to set mortgage rates. This ‘might’ lead to higher borrowing cost for home buyers.
How will it affect home buyers?
Given that most home buyers financed their homes through borrowing, the housing industry will be affected by changes to these rates. The impending rate hike already sent mortgage rates a bit higher from the previous historic lows and the rate hike will make the rates higher. Nevertheless, home buyers should not panic. Mortgage rates will be somewhat higher but not enough to derail the housing market.
The increase in the rate will not happen quickly, it will be gradual. Prospective buyers may have some time before higher rates really begin to bite. But that doesn’t mean there is no need to start moving now. The rates are still quite low by historical standards but they won’t stay that long. It is reasonable to expect higher mortgage rates over time and home buyers should not miss that opportunity, a slight change in interest rate can make a big difference on someone’s home.
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