At the Federal Reserve meeting this week, it was announced that the Fed will indeed increase interest rates, starting with today’s announcement of a .25% Federal funds rate increase.
The Fed determines the interest rate for very short-term debt. This rate influences interest rates on credit cards and car loans and has some effect on long-term debt like mortgages.
This is the first time since 2006 that the Fed has raised interest rates. The increase, which has been forecasted for the past few years, was the result of strong jobs reports and other key indicators that the Fed has been closely following.
In short, when the economy gets better, the Fed raises rates to keep the economy from getting out of control, i.e. too far from “normal.”
The main question now seems to be about the pace of the increase. In 2016, the Federal Reserve will meet eight times. What is unknown is whether they will continue to raise rates at each of these meetings.
The likely scenario is that a measured policy of increasing Fed funds rates will prevail. Since the increase has been a long time coming, it seems clear that the Fed Chief Janet Yellen is looking to introduce these increases gradually. Controlled increases provide the Fed with more maneuvering room to help the economy, if it were to slow down.
What does this mean specifically for housing? Experts say that the increase for housing has already been factored in. Over the past few weeks, we have seen mortgage rates increase from a high 3% to a low 4%. Since mortgage rates are more long term, there is not a direct correlation to the increase in the Fed funds rate, but a more directional one. Various housing experts predict mortgage rates in 2016 to increase to somewhere between 4.5 and 5.5%.
What does this mean for you as a buyer? If you are ready to consider purchasing, now is the time to move (literally!) With rents increasing exponentially, you may very well discover that purchasing a home is a better overall financial decision.
Talk with your Allen Tate Mortgage Consultant about your purchasing power today!
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