As the economy has improved, the Federal Reserve has responded by raising interest rates a total of three times throughout 2018. While most people know that this may cost them more money on big purchases, the specifics are a little more nebulous. We're going to take a look at what these increases mean for home loans, now and in the future.
What Does the Rate Increase Do?
Each individual home loan rate is determined by a number of factors, including everything from your yearly income to your credit score, so what does the Federal Reserve's rate hikes actually have to do with anything?
The rates being altered by the Fed aren't actually home loan rates. Instead, they set the rates that banks use when lending money to each other in order to meet the required reserve amounts. However, that is important because when banks have to pay higher rates to borrow money from each other, those rates trickle down and get passed onto the consumer. That means everything from credit cards and personal loans to auto loans and mortgages will be affected by rising rates.
How is the Home Loan Market Affected?
While a raise in the Fed's interest rate may seem like bad news for home loans, that isn't always the case. When loan rates go up, sellers sometimes end up lowering home prices in order to draw in more potential buyers. In other words, the projected monthly payments may go up, but the overall home price may appeal to more buyers. That can mean, in the right housing markets, higher rates can actually lead to more home loans being taken out.
It is important to note that this rate increase can, in some cases, even affect loans that are already active. Fixed-rate loans, as their name suggests, are not subject to rate changes, but Adjustable Rate Mortgages (ARMs) and home equity lines of credit (HELOCs) may be affected. In some cases, people with ARMs or HELOCs may want to consider refinancing now if their adjustment rate is coming up in the next year.
Most financial forecasts seem to favor the Fed raising rates several more times in the coming year. With that in mind, potential buyers have several things to consider. If lower monthly payments are a priority, it may benefit you to buy sooner rather than later, but if you're willing to pay a higher rate for a lower overall home price, you may actually come out better in the long run waiting to buy until after the rates have gone up again and sellers lower their prices in response.
As always, when you're considering a big purchase like a home or car, it pays to keep an eye on the financial world and to stay on top of any moves the Federal Reserve is projected to be making soon.