After months (and months) of threats and ominous warnings, the Federal Reserve finally decided to raise the targeted federal funds rate this past week. The federal funds rate is the benchmarking rate that financial institutions charge to lend each other overnight funds. The move by the Federal Reserve indicates a growing confidence in the health of the economy, and will have an impact on nearly all forms of lending - from cars to mortgages and more. Mortgage lenders have been anticipating this move for quite a long time and have been alerting consumers that a rate hike was just around the corner. Now that it’s happened, what does it mean for the average home buyer or seller? The National Association of Realtors (NAR) has a helpful FAQ post that attempts to answer that very question. Some of the most interesting observations include:Maybe mortgage rates aren’t tied as closely to the Fed’s every whim as we think. NAR economists suggest that perhaps it makes more sense to keep an eye on long-term bond rate activity than on statements from Fed Chair Janet Yellin. One of the biggest impediments to the mortgage activity has been the ability of borrowers to qualify for mortgages, and the rate hike won’t impact that as much as your FICO score. Mortgage rates are still likely to stay far below 5% through the end of 2016. Real estate and mortgage professionals see that mark as the point at which the market could be negatively impacted.
One more reason for prospective house hunters (and sellers) not to panic: History. The Washington Post’s Kathy Orton points out that during the initial increase in the federal funds rate in 2004, following the tech-boom/bust in the early 2000s, mortgage rates fell in the months following the rate hike. Despite several further increases in the next years, mortgage rates seemed to follow their trajectory and only rose modestly.
Bottom line – check in with your lender and get pre-qualified for a mortgage before you go shopping for a home. How much you can borrow is determined by much more than just mortgage rates, so do your homework and take advantage of historically great rates – remember, the average mortgage rate over the past 45 years is 8% - nearly double today’s rate.