By Gregory Cutt
Whenever you hear the media talk about the Federal Reserve increasing interest rates, the first thing they say is mortgage rates will rise. However, this is not always the case. When the Federal Reserve increases rates, they raise the Fed Funds rate, which is the rate banks are able to borrow money from the Federal Reserve. This has an immediate impact on rates for credit cards, car loans, home equity loans and short term adjustable rate mortgages, but does not have a direct impact on 15 and 30 year fixed mortgages.
Mortgage rates are tied to Treasure Bonds and Treasury Bonds are impacted significantly by inflation. If inflation increases, yields on bonds rise, which means mortgage rates go up. Even if there is a perception that inflation may increase in the future, it can cause mortgage rates to rise. One way the Federal Reserve tries to keep inflation low is to increase the Fed Funds rate, which has the effect of slowing down the economy and keeps inflation under control. If the Federal Reserve raises their rate, it is a signal to the markets they are trying to keep inflation low and this can lead to long term mortgage rates going down, even though short term rates are going up.
After the presidential election, the 30 year fixed rate increased .75% over the next couple of months. Many people thought one of the reasons for the increase was due to the fact the Fed raised the Fed Funds Rate .25%. However, over the past month, the 30 year fixed rate has fallen .375%, and is currently hovering around 4.00%. It is anticipated the Federal Reserve will increase the Fed Funds rate a few more times in 2017, but that does not mean we will see rising interest rates. In fact, with all of the uncertainty of the new administration, issues in the Middle East, North Korea and Russia, we may see rates fall even further.
What does this mean if you are thinking of buying a home and need a mortgage? If the media talks about the Fed raising rates and implies that this will have mortgage rates go up too, remember, this is not necessarily true. So don’t panic. Rates may go up, but not because of the Fed. Mortgage rates increase when the economy is growing quickly, or when the markets believe it’s going to grow quickly and inflation will increase. It is hard to predict what will happen. Rates are still at very low levels, and rates are more likely to go up as opposed to down. With this in mind and with home prices continuing to increase, now is still a great time to buy a home.
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