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How the Fed's rate change could impact mortgages

December 18, 2017

For most of the year, real estate experts projected that the Federal Reserve Board would raise basis interest rates in December, which in turn would likely have a significant impact on mortgage rates going forward. And while those effects likely won't arrive for a little while longer, they could nonetheless be significant, especially because the Fed now says it remains on track to raise the benchmark rate three more times over the course of 2018.

"The Fed voted to raise basis interest rates."

In mid-December, the Federal Reserve Board's Federal Open Markets Committee voted to raise key interest rates on short-term lending to 1.5 percent from the previous 1.25 percent, which had been in place for some time. This was just the fifth rate hike of any kind since 2009, but three more - likely all on the order of a quarter of a percentage point - are now planned for next year as the Fed projects a significantly higher economic growth rate for 2018 in the wake of the latest tax reform efforts.

What does this mean for mortgage rates?
The good news for current homeowners is this rate change will not affect them if they already have a fixed-rate mortgage, according to USA Today. But while any single small increase in short-term basis interest rates is unlikely to have a large effect on those with adjustable-rate home loans - or those who would seek to obtain a new mortgage in the next several months - the fact that more rate hikes have effectively already been announced very well might.

"Three rate increases would cost $84 more per payment."

For someone with an adjustable-rate mortgage - for which rates are typically changed each year - who enter with a $200,000 loan, three rate increases of a quarter-point each would likely cost them about $84 more per mortgage payment, the report said. Over that same time period, it's likely that mortgage rates will rise, but perhaps not as sharply as they might expect, meaning affordability could linger for some time, even if rates start to remain reliably above 4 percent.

What does this mean for the housing market?
Despite the fact that mortgage rates are expected to remain below pre-recession norms for several months to come, it's nonetheless worth noting even slight rate increases in recent years have led to less mortgage activity overall, and that trend could continue as rates push higher and price current owners out of being able to refinance, according to The New York Times. However, banks may have to balance those planned rate increases with the likelihood of declining mortgage activity overall, which could hurt their bottom lines.

Certainly these are all issues those looking to get into the market should monitor closely, but the sooner they can move to improve their finances and apply for a home loan, the more likely they will be to lock in the best available deal. This is particularly true as home prices are expected to continue rising throughout 2018.




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