Fed Rate Increase: What You Need To Know

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The Fed’s December announcement of a rate increase of 25 basis points (.25%) was highly anticipated, mostly because the last increase happened a decade ago. The threat of an increase has been looming and now that it has happened, what does the increase really mean to consumers? There’s no reason to panic. Here’s why:

meeting over coffeeFed Rate Is Not the Mortgage Rate
Headline news doesn’t always accurately portray how the Fed funds relate to home loan rates. The Fed-controlled rate is only one factor among many that influence long term borrowing costs. Mortgage rates typically move in sync with the yield on 10-year Treasury notes. Your mortgage loan advisor can help you make sense of what the rate changes mean to your current mortgage terms.

Good News
The Fed’s decision to increase rates signals an improved outlook for the health and continued growth of the U.S. economy. There are positive signs of economic recovery and access to credit is starting to open up. Before the end of the 2015, FHA announced increases to conforming loan limits in some high cost areas and Fannie Mae issued updates to loan policies which are intended to simplify underwriting and provide wider access to credit.

Slow and Steady
“Remember, we have very low rates, and we’ve made a very small move,” said Fed Chair Janet Yellen, reminding us that rates are still low by historic standards. While it is unclear how many more rate hikes will be announced this year, any additional increases will depend upon the economic outlook and are expected to be gradual. According to a post-meeting statement, the FOMC said it “expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”

Time Will Tell
Will buyers be deterred by the rate hike or motivated to shop before another potential increase? The busy spring real estate season will likely show the first signs of any real consumer impact.

Contact a loan advisor to learn more about how the current economic environment might impact your financing options.

By Amy Malloy