At long last, the Federal Reserve is raising interest rates. It’s doing that by increasing the federal funds rate, which the Fed slashed nearly to zero in 2008 to help the American economy ride out the global economic downturn. The federal funds rate determines how much interest financial institutions charge one another to borrow money. This rate has a direct effect on the interest consumers pay when they carry a credit card balance or take out a loan, and on yields for savings accounts and certificates of deposit.
Rates on savings accounts, mortgages and other financial products have been low for so long that many consumers — millennials, particularly — haven’t really known a time when borrowing wasn’t cheap and savings vehicles didn’t pay next to nothing.
Homeowners and homebuyers
A hike in the federal funds rate will steer mortgage rates higher, but it’s likely to take some time before there is a significant increase in 30-year home loan interest rates.
The Fed’s rate increase ended what has been effectively a zero-interest-rate environment, because the federal funds rate has been so close to zero for so long. The rate hike will likely mark the end to historically low mortgage rates, although the rise in such rates is expected to take time to get started and be slow once it gets underway.
However, if the Fed continues to boost short-term rates over the next two to three years — and inflation climbs — homebuyers will see mortgage rates rise significantly.
It’s important to consider that even incremental rate increases, as this one was and as future rate hikes are likely to be, are costly when imposed on big-ticket items like homes and stretched out over the life of a multiyear loan.
For instance, a 30-year mortgage at a rate of 4% on a $300,000 loan yields a monthly payment of about $1,400. A rate of 6% bumps that to $1,800 — and adds more than $130,000 in interest over the life of the loan. When higher rates are combined with rising home prices, it’s easier to get priced out of the market, especially for first-time buyers.
Getting ahead of the tide of rising interest rates can save borrowers thousands of dollars.
Via: NerdWallet by