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Interest Rates On The Rise
The Federal Reserve met last Wednesday and have raised the interest rates, for only the second time since the financial crisis in 2008, by a quarter point, from a range of 0.25 to 0.5 percent to a range of 0.5 to 0.75 percent. The Fed’s talk about how this increase may affect markets, but what about the ‘everyday customer’ – what about you?
This increase in interest rates will affect the cost of cars, housing, student loans, interest rates on credit cards (although probably not immediately), and when the Fed’s raise the rates, all sorts of expenses tick up.
First, let’s be clear. The ‘interest rates’ that everyone talks about the Fed’s increasing is the ‘Federal Funds rate.’ The Federal Funds rate is the interest rate in which banks lend to each other, not to you or me.
The Fed’s strategy is to bring the nation out of recession, and since the rate has been close to zero since 2008, there’s hardly anywhere for it to go, but up. The main goals of the Federal Reserve are to keep inflation under control while also keeping the unemployment rate as close to the natural rate as possible. Since the financial crisis, the Fed has done a commendable job, however, inflationary pressure is inevitable.
Economists expect rates to rise steadily over the upcoming years, in anticipation of President-elect Donald Trump unveiling his stimulus package and as the economy starts to improve.
Now, think about it. You’re probably not too thrilled with this news, but the bottom line is that the economy is getting stronger. Would you rather have higher unemployment rates and lower interest rates? Paying a higher interest rate is obviously not ideal, but I think it’s an easy choice for people.
Mortgage Rates
How will this affect Mortgages? If you’re going to buy a home, chances are that you’ll choose a 30-year fixed rate mortgage. These loans have become extremely affordable with the interest rates bottoming out at 3.5%.
The good news is that, in general, the Fed’s increase does not have a direct and large impact on long-term mortgage rates. However, when the Fed’s rates go up, the bank finds ways to pass their higher borrowing costs to customers. Since long-term mortgage rates are set, banks will also factor in the anticipation of future increases in interest rates – which is why we have seen mortgage rates shoot up in the last couple of months.
Bottom Line
The mortgage rate (although I mentioned earlier that the Fed’s interest rate increase does not directly impact this), plays a huge part in how much money your lender will let you borrow. In return, this affects how much home you can buy. Many home buyers realize that rising interest rates can limit their ability to buy.
If you’re nervous that rates are going to rise, consider locking in today. Today’s rate maximizes your ability to buy a better home and with affordable payments. Don’t wait it out to see if interest rates will go back down, because as expressed earlier, it is predicted that rates will tick up over a period of time. Don’t wait; buy now!
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