The Federal Reserve Approved an Interest Rate Hike - How Will It Affect Your Mortgage?

The Federal Reserve agreed to increase the interest rate by 0.25 points this week, in order to keep up with rising inflation, which catches up the highest number in history. This increase is the first in three years, and the Fed has six more planned in the next nine months.

The Fed stated that this is a time of uncertainty for everyone, the pandemic is not over yet, the Eastern European conflict is creating pressure on the US economy, and inflation is soaring. All that being said, they decided that the fight against booming prices should begin sooner rather than later.

In addition to the interest rate increase, the Fed announced cutting the $9 trillion balance sheet reduction, made up of mostly Treasuries and mortgage-backed securities. Why did this happen and, more importantly, will it affect homebuying borrowers?

The Increase is Addressing the Inflation Rate

The interest rate was held near zero after the pandemic struck, and this amplification came at a time of recovery for the US economy. When addressing the media, the Fed announced that the 0.25 point increase comes at a time when the job market is strong and the unemployment rate edged down to 3.8%.

On the other hand, the annual inflation rate hit 7.5% - a higher number hasn’t been seen since the 1980s. The Fed has to balance between raising rates too quickly and too slowly - raising them too quickly could bring the US economy to a recession, but inflation can get uncontrollably high if they don’t do it soon enough.

They estimated that six more 0.25 point increases this year could bring down inflation to 4.3%. Following that with additional hikes in the next two years, their estimate is that the inflation rate can fall to the goal number of 2.3%.

What Can Borrowers Expect?

Long-term mortgage rates are affected by the economy and inflation, and usually follow short-term rate’s motion. The 30-year-fixed rate just passed 4,1% and is the highest in three years. Borrowing gets twice more expensive as in 2020, and the rate will continue to rise.

Homeowners with adjustable rates will feel the impact of the Fed’s actions more directly, as home equity lines of credit (HELOC) don’t get adjusted annually, but rather immediately. Experts advise refinancing for HELOC borrowers and switching for a fixed-rate mortgage.

Credit card debt will be the most visible consequence of the Fed’s increase because the credit card has a variable rate and is connected to the Fed’s benchmark. Car loans and student loans should not be affected, because they are usually locked in at a fixed rate.

New borrowers for auto-loans should be more concerned over the car prices soaring, than the rate of interest getting higher, as that would be up to $5 on their monthly bill.

It seems like buying a house is getting even harder to achieve, especially for first-time buyers, who often rely on some type of loan. The housing market has been rough for lower-earning families and those who do not have a pristine credit history. Cash payments are taking over, and people with FDA loans get priced out, unable to compete, with the median house price soaring in the past quarter, passing $360,000.

Author:

Cesar Gomez , Broker /

Cesar has worked as a real estate agent and broker in the southern California region since 2013.

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