How Does the Fed’s Rate Increase Really Affect Mortgages?

It’s hard to miss the headlines about the Federal Reserve’s benchmark interest rate hike – a full three-quarters of a percentage point, the biggest increase in 28 years. So what does that mean for mortgages? While it’s true that efforts to tame inflation by increasing the short term lending rates affects everything from credit card borrowing and car loans to, yes mortgages, it’s not as straightforward as many people assume, especially where 30 year fixed mortgages are concerned.

The Fed’s Benchmark Rate & Mortgages

Households directly affected by this interest rate hike are those with adjustable-rate mortgages or home equity lines of credit. Take a close look at your loan paperwork for an idea of how this rate increase will affect you, paying particular attention to the date of your next loan adjustment, the index to which your loan is tied, and the margin added to that index.

If you have a home equity line of credit, rates will creep upward at some point over the next 60 days or so. But remember the big picture – this rate hike is one in a series planned for this year and likely into 2023, so the real effect will be cumulative.

But what about the effect on the ever-popular 30-year fixed? Mortgage experts will tell you that federal fund rate increases don’t directly impact fixed-rate mortgages. That’s because the coveted 30-year fixed rates are actually most closely tied to the 10 year bond rates —not the short term interest rates the Fed is in the process of raising.  

In fact, 30-year mortgage rates don’t usually rise in line with the Fed rate hikes. Sometimes they even move in the opposite direction. Long-term mortgages tend to track the rate on the 10-year Treasury, which, in turn, is influenced by a variety of factors. These include investor expectations about future inflation and global demand for U.S. Treasuries. To get a handle on what 30 year rates are doing- look at the 10 year Treasury bonds, add 2% to that yield amount, and the result is a good ‘back of the napkin’ calculation of where the 30 year fixed rates are landing. Your neck of the woods plays a role too. Banks have different mortgage rates for different parts of the country. In bigger, more competitive markets, rates have to likewise be more competitive and recently we were seeing jumbo 30-year fixed rates (which varies by state but in general is a loan of $627,200 and above) being offered at much lower rates than conforming loans.  

Looking Ahead

While the era of ultra-low interest rates may be behind us, there are plenty of lending options out there. The rates, options and parameters of the loans available are as wide and varied as the number of different lenders are out there, so if you’re currently shopping for loans, don’t get discouraged. Finding a loan product that will work for you may take a little time and effort, but decent loans do exist and in truth as long as you can afford your monthly payments, most borrowers end up refinancing long before the end of their loan term. As always, if you need a recommendation, you know where to find me! 

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