Mar. 21, 2018.
As expected, the Federal Reserve raised interest rates for the first time this year on Wednesday, March 21, 2018. When the Federal Reserve increases interest rates, it directly impacts short-term interest rates with potential effects like higher car loan and credit card rates and a slower job market. A Federal rate hike can also impact mortgage rates indirectly and has special significance for homeowners and buyers.
The Federal Reserve raised rates a quarter point, and similar increases are predicted in June, September, and December. Rates rose from 1.5 to 1.75 percent, their highest in a decade. “Rising rates appear to be inevitable,” Scott Cummins at Cornerstone Home Lending, says. “The consensus is for three to four more rate hikes by end of the year. This will directly impact the APY on bank accounts and the rates on credit cards and car loans, but I don’t expect much of an impact on mortgage rates.”
Cummins says that, if anything, a Federal rate increase will give more support to a steadily rising interest market over time, but he doesn’t anticipate drastic changes immediately. “For those buyers who have been on the sidelines, it is a great time to buy and lock in at both a lower rate and lower purchase price. And with a new sense of urgency, sellers can often find the market rewarding.”
You can get more information on how a Federal Reserve rate increase could affect your monthly bills by reading our analysis of the last rate hike in 2017. Our loan officers also discuss the possible impact of the predicted Federal rate hike for March 2018, which just occurred, here as it relates to economic growth, housing prices, and mortgage rate increases.
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What does the Federal rate hike mean for the economy?
When the Federal Reserve raises interest rates, as it’s expected to three times this year with the potential for a fourth, it indicates that:
- The economy is getting healthier. As a result, the Fed is working to bring rates back to “normal.”
- The economy is getting stronger. Low interest rates can help a struggling economy bounce back from a recession. Progressively rising interest rates show a slowly recovering economy.
- The Fed is fighting inflation. Keeping interest rates too low too long will encourage people to keep spending instead of saving. This can increase prices, otherwise known as inflation.
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What does the Federal rate hike mean for homeowners?
Fixed mortgage rates, most often granted in 15- to 30-year loan terms, are less sensitive to short-term federal funds rate increases. Homeowners may see:
- Increased monthly payments on adjustable-rate but not fixed-rate mortgages, likely to be delayed until several rate hikes occur within the year.
- Some market mortgage rate increases. As Cummins explained above, he expects the impact on mortgage rates to be minimal. But for sellers, the potential for a rate increase could create a hesitancy to move and give up the low rate they may currently have. Still, rates are historically low. Homeowners looking to move or refinance are not likely to be affected by a slight rate increase.
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What does the Federal rate hike mean for homebuyers?
The economy is healthier, and compared to decades past, mortgage rates are still historically low. After the Federal rate hike, homebuyers may see:
- Mortgage rates continue to rise. This may not be the news every buyer wants to hear, Cummins says, since a rate increase could erode purchasing power and increase a monthly mortgage. It’s for this reason that Cummins, like many loan officers, suggests that buyers consider purchasing a home this year, while rates are still competitive, low, and stable. “That same home next year could cost thousands more and have a higher payment than today!”
- Housing demand decrease. In the long run, mortgage rate increases often discourage people from buying houses. Less demand can lower housing prices, making homes more affordable. However, many markets in the U.S. are currently experiencing high demand and housing appreciation reflected in higher prices — a benefit to sellers hoping to move and trade up.
For homeowners and buyers, you may not see the effects of the latest Federal rate increase right away. At least, when it comes to your mortgage. But within the year, it could get more expensive to borrow. If you’re ready to buy or sell, now may be the right time to get in touch with a loan officer and discuss your options before rates climb higher. Click here to find a Cornerstone loan officer in your state.
For educational purposes only. Please contact a qualified professional for specific guidance.
Sources are deemed reliable but not guaranteed.