by Bryan Dornan
With Donald Trump winning the election, interest rates have started to go up, and the Federal Reserve has promised that interest rates will be increased next month when they meet as well. When the Fed raises rates it doesn’t always mean mortgage rates for all types of loans rise.
Sometimes there are new opportunities that arise for consumers to find affordable housing. So how will higher mortgage interest rates affect homeowners and people who want to buy a home? Below are the ways that you could be affected.
Let’s also examine exactly what the Federal Reserve does.
Many people don’t know it, but the Federal Reserve affects your family’s finances more than the IRS does. The interest rates that you pay and earn on your money, how much credit you have available and even job availability are linked to what the Federal Reserve does.
The Federal Reserve meets regularly in Washington DC to establish monetary policy. They do this mostly by raising or lowering the federal funds rate. This is the rate at which banks can lend money to other financial institutions. The primary mission of the Fed is to provide economic growth without causing inflation. Here are the most common ways that changing interest rates affect home owners, buyers and consumers generally:
#1 Mortgage Rates
Clearly, the biggest thing that home owners and home buyers are concerned about when rates rise is paying a higher mortgage interest rate. An increase in interest rates will affect some mortgages, but not all of them. The impact that a rate increase has on mortgages depends upon what type of mortgage you have or are getting.
If you have a 30 year mortgage already, increasing interest rates will not affect your monthly payments. However, if you have an adjustable rate mortgage, the rising interest rates may affect your rate when the introductory period ends. Still, it is hard to predict, even with ARMs. Most adjustable rate mortgages are linked to Treasury yields, and these can move with the Fed or with the London Interbank Offered Rate. The latter does not always move when the Fed moves.
You should know, though, if you have a home equity loan or a home equity line of credit (HELOC), your rates on these will probably rise, and your payments will rise. You should keep in mind that even if your payment does rise, rising interest rates often bring a lot of good with them too. While it can be more expensive to borrow money, the Fed is making the move because it believes that the economy is improving and more economic growth is on the horizon. You might get a pay raise or a promotion, or find a better paying job!
Note: If you are buying a home now, you will want to make sure that your rate is locked in for as long as the lender allows it. In a time of rising rates, you could easily end up paying $50 more per month or more if rates rise by 1/2 a point.
#2 Credit Cards
How much an interest rate increase affects your credit card debt will depend if your credit card has a fixed rate or variable rate. If you have a fixed rate card, you probably will not see a change. But if you have a variable rate that is connected to the prime rate, a federal funds rate increase will increase your interest payments. Note that even if you have a fixed rate card, the credit card company can alter its interest rate when it likes, as long as they provide you with notice.
If you are planning to finance anything, such as a car, boat or furniture, you will probably see an increase in your payment, if you do not already have the loan. When you buy a car, for example, your interest rate is locked in for the life of the loan. So if you are thinking about financing a major purchase, you may want to do it before the Fed raises rates.
One bright spot when the Fed raises rates is that savers get more interest on their savings. This is one area where super low interest rates have hurt many consumers over the years, especially older Americans with savings and certificates of deposits. Many people have had difficulty finding investments that paid a decent return without taking undue risk. If you are planning to buy a new CD, you may want to wait until interest rates rise more, such as after the Fed takes action in the near future. You could make substantially more money on your savings.
The Bottom Line
As with any move on Fed interest rates, any chance has pluses and minuses. For people who are planning to buy a home in the near future, you could see slightly higher payments with higher rates. However, bear in mind that everything is relative: Thirty years ago, people were paying 12% for a mortgage. If you are able to still get a 4% mortgage even after the Fed raises rates, historically that is an incredibly low rate!
It will be very interesting to see what happens to mortgage interest rates under a Trump presidency. While higher rates mean higher mortgage interest rates, this also means that we probably are seeing stronger economic growth, which helps almost all Americans who are working.