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Fed Raises Rates — What It Means for Buyers and Sellers

The Federal Reserve recently raised the fund rate 0.25%. This is the second increase this year and more increases are expected in 2018.

Even though the Federal fund rate is not linked directly to mortgage interest rates, its movement can impact mortgage rate fluctuations.

To recap, the Federal Reserve sets the short-term rate for the overnight exchange of money by banks (i.e., banks borrow from one another). The Fed will adjust this rate depending on the outlook for the overall US economy.  These gradual increases are a sign that economic conditions are stronger and more robust, which is good news for both buyers and homeowners who want home values to be better.

What It Means for You

Mortgage rates have already been on a steady climb for much of 2018. The 30-year fixed-rate mortgage rose last week to 4.76%from 4.70%. The 15-year fixed-rate mortgage ticked up slightly to 4.18% from 4.16%.  Earlier this year the average 30-year fixed rate was 4.10% on January 3rd, and the average 15-year fixed rate was 3.49%.

The cost of borrowing increases if mortgage rates start to tick up.  Even though mortgage rates are still historically low, even a 1 percentage difference can add an additional $50 or more to a monthly mortgage payment depending on the loan amount.

The Fed rate’s increase could not only impact mortgage rates but also the dynamic of the housing market and how both buyers and sellers will react to the expected increase cost of borrowing, especially if the Fed plans to raise the fund rate again this year.  

Here’s how it could impact homebuyers:

  • First-time buyers and those on a tighter budget may want to jump start their home search before the next Fed rate increase and the ones to follow, which could slightly push up mortgage rates some more.
  • Buyers of more expensive homes with larger loans will see the most increases in monthly mortgage payments when interest rates go up even slightly.

Here’s how it could impact sellers and homeowners:

  • Sellers may want to list their homes sooner to benefit from the influx of buyers looking for more affordable rates and conditions.
  • Homeowners most likely will put off refinancing if rates continue to increase, especially if they already have a super low rate.
  • Homeowner with adjustable-rate mortgages (ARMs) and home equity lines of credit (HELOC) could see their can bills increase within the next couple billing cycles.

Let us know if you have any questions about the possible impact of the recent federal reserve rate on mortgage interest rates. We can go over the numbers with you on how increases in mortgage rates could affect your monthly payment.

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