As anticipated, the Federal Reserve raised its target federal funds rate on Wednesday to a range of 0.25 to 0.5 percent, the first increase in nearly a decade. The federal funds rate affects several areas of your finances from credit card interest rates and home equity lines of credit to student loan rates and your homebuying circumstance.
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The housing market recovery has been largely aided by near-zero interest rates but with the move of the short-term interest rate, long-term rates (like mortgages) will also experience an eventual uptick. The Fed’s post-meeting announcement cited progress in job restoration, wage growth and moderate economic expansion as evidence that the economy no longer needed as much help from ultra-low borrowing rates.
Lower mortgage rates mean more affordability and more purchase power. Though the federal funds rate isn’t directly tied to long-term mortgage rates, gradual increases can be expected and even a small bump in the 30-year fixed mortgage rate can significantly decrease mortgage affordability.
For example, if you bought a $200,000 home with a 10% down payment on a 30 year fixed-rate mortgage at a 4% interest rate, your house payment excluding taxes, insurance and private mortgage insurance would be approximately $860/month.
A bump of 0.5% in your interest rate would raise your principal and interest payment to approximately $912/month. Therefore, a jump in mortgage rates could not only decrease mortgage affordability but shut some potential buyers out of the housing market completely.
In the post-meeting statement, Fed officials said the interest rate policy would continue to be “accommodative” and increases will be gradual over the next few years. As far as mortgage rates go, some investors are predicting early 2016 will likely be one of the last times homebuyers will be able to take advantage of low mortgage rates.
If you're interested in taking advantage of near-historically low mortgage rates, download our free Mortgage 101 Handbook, a great resource for first-time homebuyers. Interested in refinancing? Download our free Refinancing Guide for options.