The Federal Reserve hiked short-term interest rates last Wednesday in a move largely predicted by economists, and it also suggested that three more additional increases could occur in 2017. So how exactly does this affect rates on mortgages.
Will Fed interest rate increases raise rates on mortgages?
What does this mean for mortgage rates and buyers?
To begin with, the Fed doesn’t set mortgage rates. The short-term rates impacted by Fed moves are different from long-term rates. Rates on mortgages typically follow long-term bond rates, including the 10-year U.S. Treasury note, which change based on investor demand. Longer-term rates typically adjust before the Fed makes a move.
Indeed, mortgage rates have risen near to 60 basis points since the presidential election, or more than twice the quarter-point increase that the Fed announced on Wednesday.
If the Fed follows through on its three proposed short-term rate increases the coming year, it may well likely raise the rate of interest by 75 basis points, assuming the Fed sticks to its current quarter-basis-point-at-a-time system.
“That means rates like we’ve seen for most of the past five years are indeed history,” writes Jonathan Smoke, realtor.com’s chief economist, in his latest column. Mortgage rates in the 3 percent range are gone.
“Mortgage rates will move higher before the Fed acts again, so if the Fed carries out its three planned hikes in 2017, we could come close to 5 percent on 30-year conforming rates before the end of next year,” Smoke says.
On Wednesday, the typical 30-year conforming rate was just under 4.2%.
Smoke believes that rates are very likely to move in the month ahead of each key Fed policy meeting. As such, the important meetings to note are in March, June, September, and December 2017.
How big of an impact could rising rates have within the coming months? A median-priced home would have a $978 per month payment at Wednesday’s rate of 4.2% (assuming a 20% down payment), realtor.com notes. Take that rate to 5%, and the monthly payment jumps to $1,074, or almost $100 more.
“If you intend to buy next year and finance the purchase with a mortgage, acting sooner rather than later will cost you less,” Smoke says to home-buyers.
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