What do Fed rate increases mean for home mortgage rates?
When the Fed increases rates, there can be a common misconception that mortgage rates move in unison or go up in general. That is not necessarily true.
The Fed increases the Federal Funds Rate (FFR), which is the benchmark rate that influences how much consumers pay borrowers and what they are paid to save. Banks set their rates based on this, and it directly impacts Home Equity Lines of Credit, CDs, savings accounts, and credit card rates. The term Prime Rate refers to what banks charge their best customers. So, it makes sense that if these rates go up, it could impact consumer spending.
This is a necessary step to curbing inflation which is a major concern right now. We all love low rates for everything, but the equation is not that simple.
So how does this impact mortgage rates? First, what dictates the direction or mortgage interest rates is the purchase and sale of Mortgage Backed Securities (MBS) on the secondary market. Investors purchase these as they would other investment vehicles such as stocks, bonds, etc. It is a matter of where they perceive they will receive the best return on their money. Economic news indirectly influences mortgage rates – Jobs Report, Consumer Price Index, GDP, Producer Price Index, global events and economic conditions (Ukraine), oil, pandemic, etc.
The FFR indirectly influences longer-term interest rates. Investors want a higher rate for a longer-term Treasury note. The yields on these notes indirectly drive long-term conventional mortgage interest rates. When the Fed makes a move, it can take months before the impact is felt. Regarding mortgage rates, they are influenced by what the Fed does or even says and how that impacts the markets. If the Fed says they are going to raise rates by 0.75% and does so, mortgage rates may already have factored this in preparing for such. But, if the Fed were to only increase by 0.50%, for example, all markets would react, and pricing will be influenced as a result in either direction.
There is a lot of speculation about mortgage rates, and NOBODY has a crystal ball. The general opinion is that rates will continue to rise, and that is what has happened so far this year (more than expected). However, some economists think there is a possibility that mortgage rates will come down late this year and into 2023. Factors such as a potential recession and how severe one, if so, will influence this. Time will tell.
Important Strategies
So, what should you do? First, find out how this impacts any liabilities you have. If you have a Home Equity Line of Credit (HELOC), it is a variable rate tied to Prime, most likely, and you will see your interest rate go up and your payment in unison. Most HELOCs have a fixed-rate conversion option. Explore the terms for this and consider locking in now since more Fed rate hikes are expected. Just realize that if you are making interest-only payments on an equity line, a fixed-rate loan does not have that option, and your payment will be higher as a result, but you would be paying down the principal as well. Depending on your loan size and how soon you expect to pay off the equity line, consider if it makes sense to consider doing a refinance to consolidate this into a new mortgage combining both loans. This will depend on your 1st mortgage interest rate and balance to see if it makes financial sense.
The same goes for credit cards and other debt. Does it make sense to consolidate? If you have too much parked in savings with a low return, talk to your financial adviser (need a referral – give Steve at 7 Locks Lending a call, and we will connect with a local professional.
The moral of this story is that rates will always be different depending on the economic times. It is critical that you engage the professionals in your lives to assist you with important decisions – Don’t Go It Alone!!! Mortgage, CPA, Financial Advisor, Realtor, Attorneys, etc.
