The Fed put rates at zero in December 2008 to revive the collapsed housing market during the Great Recession. Now, America is no longer in crisis mode and the economy can bear paying higher rates. A rate hike is a sign that the U.S. economy is improving.
Here's how the Fed's rate hikes could affect you.
- The Fed raises or lowers the overnight cost of money, “Fed funds,” not mortgage rates -- but mortgage rates did rise a little today.
- The Fed plans three more hikes through 2017.
- When short-term rates keep rising, but long-term rates stop, THEN it's time to worry.
- Potential homebuyers, expecting further rate hikes, are increasingly looking to lock in low rates before they go up, while refinance requests have dropped significantly (32% ) since November.
The Fed estimates two more hikes next year, possibly three. It will continue to hike until it either slows the U.S. economy to growth well under 2 percent and sees the unemployment rate rising to 5 percent or a little more, or (by accident) causes a recession.
$1,000,000 Home Purchase:
Home Value Index: $1,000,000
Mortgage Payment at 4.0%: $3,473.70
Mortgage Payment at 4.25%: $3,689.55
Difference in Monthly Mortgage Payment: $215.85
$600,000 Home Purchase:
Home Value Index: $600,000
Mortgage Payment at 4.0%: $2,241
Mortgage Payment at 4.25%: $2,322
Difference in Monthly Mortgage Payment: $81
$250,000 Home Purchase:
Home Value Index: $250,000
Mortgage Payment at 4.0%: $934
Mortgage Payment at 4.25%: $965
Difference in Monthly Mortgage Payment: $31
Fresh economic forecasts, the first since Trump won the Nov. 8 election on promises of tax cuts and increased infrastructure spending, showed policymakers shifting their outlook to one of slightly faster growth, lower unemployment and inflation just under the Fed's 2 percent target.
The projected three rate increases next year would be followed by another three increases in both 2018 and 2019 before the rate levels off at a long-run "normal" 3.0 percent. That is slightly higher than three months ago, a sign the Fed feels the economy is still gaining traction.
Markets and the Fed appeared to be close on their rate outlooks, with Fed futures markets pricing in at least two and possibly three hikes in 2017.
Other things a Fed rate hike means for you:
1. Savings accounts will pay more
2. Big ticket buyers: rates are rising but still low
3. Fed likely won't end the Trump market rally
For potential homebuyers, the effects of the rate hike are harder to gauge. “We’re facing higher mortgage rates in the U.S., but I don’t think it will happen immediately,” said Perc Pineda, senior economist at the Credit Union National Association. While the costs of a fixed-rate mortgage have risen in the past couple of months, rates so far have merely returned to the levels of 2014 and 2015. “We’re not in uncharted waters,” Pineda said.
For Buyers looking ahead however, 2016 looks to be your "Golden" opportunity. With 2-3 more rates hikes forecast in 2016 and continued hikes projected in 2018 and 2019 6% rates (While still historically low) could be right around the corner....