Feds raise rates today – how will that affect you?

Today the Feds announced just the second rate increase since 2008. The justification for the rate increase was that the economy continues to get stronger and move closer to the 2% inflation rate that the Federal Reserve considers a solid rate of inflation for a healthy economy.

Fed speak indicated that it is anticipated there will be 3 more rate increases in 2017. 

Federal funds rates do not directly affect mortgage rates but…

Federal funds rates are the rates that banks charge each other for short term loans they need to keep their reserves at a set level to ostensibly prevent another bank melt down.

The federal funds rate can directly affect the cost of housing, rates paid on credit cards, auto and other installment loans and student loan rates.

Mortgage rates are not directly tied to federal funds rates, but banks do find ways to pass on current and anticipated future costs to consumers. With the forecast that bank short term borrowing rates are likely to increase at least three times in the next year, banks are already looking at the losses they will be incurring on the hundreds of millions of 30 year fixed rate loans with rates at and below 4% that have been funded over the last 8 years; as well as losses they will sustain on new mortgages funded now before more rate increases kick in during the coming years. 

However, to put all this in perspective, the banks have been paying basically zero per cent over the last 8 years, while the lowest mortgage rates funded during that same time period was 3.5%. Not to mention that banks have been charging fifteen to twenty percent on credit card debt. This is why most banks are not hurting at all, and in fact have been more profitable than ever over the last several years since the recession ended. 

As regard mortgages, as of today, the average rate for a 30 year fixed rate loan has risen to 4.3%, up from 3.5% available from many lenders to the most qualified buyers just a few weeks ago. 

Still on the fence about buying a house? The forecast is that rates will continue to rise which will reduce buying power for most applicants. It is possible mortgage rates could rise as much as one per cent in 2017. If you’re currently home shopping, be sure to keep in touch with your lender AND keep your pre-approval up to date so you’re aware of how much you can afford at all times. 

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