How Does the Fed's Interest Rate Hike Affect Home Buyers?
Are you buying a house in the new year? If so, the decision by the Federal Reserve to raise interest rates could affect you. How will this impact your home-buying abilities?
What Has Happened to the Interest Rate?
Since the Federal Reserve lifted its benchmark short-term interest rate for the third time in 2017, it seems likely that credit card payments, home equity loans, and payments on adjustable-rate mortgages will increase. The interest rate changed by a quarter of a percentage point. For those who own a home, it is not so much the impact of a single increase that can be damaging to budgets but the impact of many increases over the course of time that can throw your budget off.
The Impact on Variable Rate Mortgages
Existing homeowners will feel the impact of interest rate changes in their variable or adjustable rate mortgages. If you have an adjustable-rate mortgage, your interest rate is linked to the prime rate, which is connected to the key rate that the Federal Reserve sets. While adjustable rate mortgages are often lower than fixed-rate mortgages, a mortgage with a variable rate carries with it the uncertainty that comes from being connected to changing interest rates. Rates on adjustable-rate mortgages change annually, and with three quarter-point changes in the last year, there will be a small but significant change in homeowners' mortgage rates. For every $100,000 owed, that is approximately a $42 change per month. If your mortgage is low, that will not be a huge hit, but if you owe a lot on your mortgage, that change will be significant.
Are You Thinking of Buying a House?
What is the prognosis for new home buyers? New buyers may choose to buy a home with a fixed-rate rather than a variable rate mortgage if they are concerned about the rise in interest rates. This locks them into a specific mortgage rate for years. Usually, mortgage rates depend more on the 10-year Treasury yield than on the federal funds rate. However, home buyers may choose to leap into the housing market earlier rather than later, just to lock in a lower fixed-rate mortgage. Those who purchased a home earlier in 2017 are smiling now as interest rates rise. If you are thinking of buying a house, this is something to consider.
What About Your Other Debt?
An increase in interest rates is a time to reflect on your debt. If you have a home equity line of credit that is running a high balance and a credit card that you use to its maximum, an increase of a quarter of a percentage point may not seem like much, but it could be a factor in your decision to find a new home. Higher expenses can drown your budget, and you could consider buying a house in a less expensive area if these expenses are just too much.
At Open for Homes, we want you to enjoy the experience of buying a house. We know that it can be difficult to find information on your options. That is why we have created the blog at Open For Homes to provide you with the information that you need as you buy, rent, or sell your home.