The Federal Reserve has been increasing rates this year and is expected to raise rates again this month. So how does that affect you and how does it affect interest rates?
Why is the Fed raising rates? The Federal Reserve works to encourage a strong economy and stable prices by setting the nation’s monetary policy. One of it’s main tools is raising and lowering the federal funds rates – this is the rate that banks lend money to each other overnight. When the economy is strong and inflation rises, the Fed may raise rates to lower inflation and cool down the market. Raising rates makes it more expensive to borrow money and can slow down spending and help keep inflation in check. When we are in a recession, typically the Fed will lower rates to help stimulate the economy. The federal funds rate affects other interest rates, including 30 year mortgage rates. It also affects your credit card rates, car loan rates and home equity loans.
Mortgage rates are influenced by the yield on the 10 year Treasury Note. They are also affected by the overall condition of the economy. When the economy is strong and growing, rates tend to rise. A strong economy means inflation is likely to increase. When the economy is weak or in a recession, rates tend to fall. Right now the reports are showing inflation is still higher than the Fed is comfortable with. The employment numbers have also been strong. This means the Fed feels they need to raise rates again next week. The discussion is between a .75 and 1.0 increase. Investors have priced into rates a .75 increase in the Federal Funds Rate. Once the Fed meets and releases their announcement, we will see the reaction from investors. If the Fed does has is expected, we could see interest rates drop. Most of the reaction will come from the Fed Chairman’s announcement after the meeting. There are many that expect interest rates to drop in October, but it will depend on what the Fed Chairman says.
So what does this mean for those looking to buy a home? First of all, don’t panic. Compare rates and fees with lenders. Get pre-approved for your home loan. When you find a home you love, write an offer and buy it! What we are hearing is that home prices are not going to drop, but will not continue to increase as fast as they have been. An increase of 25 basis points on a $250,000 loan will add about $30 to the monthly payment. Figure out your budget and be smart about how much you are borrowing. Remember that if/when interest rates do decreae, you can always refinance.
What does this mean for those thinking about selling? Homes are still in demand, don’t let a Fed increase stop you from listing your home. It is still a seller’s market, although in some areas, it is getting to be a more “normal” market. There still are not enough homes on the market but you may not get as many multiple offers.
If you are still not sure what to do, talk to a realtor or loan officer. Our jobs are to help you make informed decisions. None of us have a crystal ball, but we can help you with what we do know! I do know interest rates are still lower than they have been in the past and still lower than the average rate over the years. The long time average for a 30 year rate is just under 8%, so rates are still very good – we are just a bit spoiled over the past couple of years!
Leslie Vanderwerf, NMLS ID#335509, CrossCountry Mortgage LLC, An Equal Housing Lender, NMLS#3029 – Email – Website