The Federal Reserve members are showing strong indications that they will begin to raise the Federal Funds Rate in December, which has held the effective rate at zero for seven years.
Many people are confused as to the Fed’s impact on mortgage interest rates. While the Federal Reserve members do influence mortgage rates, most mortgage programs and rates, such as the 30 year fixed, are not directly tied to the Fed’s decisions on the Fed Funds Rate. Market forces and other factors such as inflation and economic data impact long-term mortgage rates. With positive economic news regarding the labor market and a few signs of mild inflation, mortgage interest rates have begun to slowly rise. The Federal Reserve will move to slowly increase the Federal Funds rate which, again, does have an effect on mortgage rates, but there is not a direct correlation.
If you have an adjustable rate mortgage you should be aware of the impact of the Federal Funds Rate on your mortgage interest rate and payment. This is especially true with a Home Equity Line of Credit where the interest rate is tied to the Prime Rate. As the Fed’s begin to raise rates, these loans will increase in lock-step with the Fed Funds Rate. Another common index used for adjustable rate mortgages, LIBOR, while not in lock-step with the Fed Funds Rate, usually tracks the Fed’s movement. Homeowners with these types of loans can expect their payments to increase in 2016.
While most economists predict mortgage interest rates will increase from our record low levels, fixed rate mortgages will not move in lock-step with the Fed’s movements and barring any unexpected news, the rise in mortgage rates should be gradual.