After the Federal Reserve raises its rate, interest rates on mortgages and home equity loans could rise. How will this affect home buyers and homeowners?
What The Federal Reserve Did, And Why
The Federal Reserve raised its bedrock interest rate. Mortgage interest rates are likely to rise, as well as home equity line of credit rates.
The Fed increased its target rate for federal funds by 0.25% or one quarter of a percentage point. The federal funds rate is not the only interest rate. Large banks often charge a prime rate on corporate loans. It will also rise by 0.25%.
As an inflation-fighting measure, the Fed is increasing its interest rates. The Fed will likely raise the federal funds rates multiple times this year, as inflation is significantly higher than the central bank’s target.
How the Fed Rate Hike Affects Home buyers
Because mortgage rates tend to move in the same way as the federal funds rate, they are likely to increase. Mortgage rates could trend up throughout the year due to anticipated increases.
You’re good if you have signed a contract to purchase a home and locked in an interest rate. Your rate cannot be increased by the lender.
However, if you are shopping for a home right now or have plans to do so in the future, your mortgage interest rate might be higher once you receive a purchase offer. A contract is required to purchase a home. You cannot lock the interest rate.
You may find yourself shopping at a lower price if mortgage rates increase significantly well before you purchase your dream home. Higher interest fees can reduce your purchasing power.
You shouldn’t rush to purchase a home just because the mortgage rates are increasing. You should seek the help of a professional real estate agent to help you out. The rates shouldn’t be the sole driving factor in deciding whether someone should purchase a home. Rates are a factor, but financial and personal factors are more important.
How Does The Fed Rate Rise Affect Mortgage Refinancers
As interest rates rise, fewer homeowners will be able to refinance to a lower rate to reduce their monthly payments.
Not everyone refinances to cut back the payments they make per month. Many go for cash-out refinances. They refinance much more than what they owe and then take the difference in cash. This cash can be used to pay for renovations, debt consolidation or tuition.
Interest rates that are higher can reduce the amount of cash-out refinancers could afford since higher interest rates lead to higher monthly payments.
The home equity line is another option to cash out refinances. However, HELOC rates are expected to increase. Fixed-rate home equity loans will likely experience the same fate.
How the Fed Rate Hike Affects Home Sellers
If you’re a home seller, you may be taking offers seriously if they come from home buyers with a preapproved mortgage. But in order to be more comfortable and confident in the ability of a buyer to afford the house you’re selling, you need to make sure that the preapproval is based on the existing interest rates.
Why? If you accept an offer from someone who is not qualified for a mortgage loan, you will lose valuable time.
You may sell your home to someone who belongs to a higher income bracket than the one you marketed your house to initially.