The Fed just hiked rates. Here’s what it means for mortgage borrowers

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Will you end up paying more for a mortgage this year?


Key points

  • On March 16, the federal funds rate increased by 25 basis points.
  • Although the Federal Reserve does not set mortgage rates, its rate hikes can impact everyday borrowers.
  • If mortgage rates rise, there could be fewer homebuyers to compete with, which could lead to lower home prices.

It’s a common misconception that the Federal Reserve is responsible for setting consumer interest rates, such as the rates charged to borrowers for products such as personal loans and mortgages. In reality, the Fed is responsible for the federal funds rate, which is the short-term borrowing rate that the banks charge each other.

However, Fed actions tend to influence consumer interest rates. And that can be a good thing and a bad thing.

When the Fed raises interest rates, consumers may see higher rates on loan products and credit cards, making borrowing more expensive. On a more positive note, this could also lead to higher interest rates for savings accounts and CDs.

On March 16, the Fed raised its interest rate by 25 basis points, or 0.25%, marking the first rate hike in several years. The Fed also indicated that it plans to implement six more rate hikes this year.

In light of this, mortgage borrowers should expect to see higher interest rates when shopping for home loans. But whether that’s a bad thing is another story.

Higher rates could reduce competition

At first glance, the idea of ​​paying more interest on a mortgage may seem like a bad thing. But rising rates could end up having a positive effect on the residential real estate market: it could scare away more buyers. This, in turn, could drive down house prices.

Home prices have been at record highs for months. In January, the median existing home was selling for $350,300, marking an annual increase of 15.4%, according to the National Association of Realtors.

The problem is compounded by the fact that housing stock is at an all-time high. At the end of 2021, there was only 1.6 months of housing supply available on the market. Normally, it takes a 4-6 month supply of homes to create an equalized housing market where neither buyers nor sellers have the upper hand.

Because housing stock has been so low, demand has exceeded it – and prices have soared. But if rising mortgage rates lead to lower demand, house prices could quickly begin to fall, making them more affordable for buyers who aren’t ready to stop looking for a home of their own.

How to get a competitive mortgage rate

While borrowers should expect mortgage rates to rise over the course of 2022, they can still take steps to get a better deal on a home loan. First, it’s important to shop around with different mortgage lenders, as offers can vary widely from one loan source to another. Next, borrowers should do their best to improve their credit scores, as lenders tend to give lower rates to consumers with exceptional credit.

Finally, it pays to eliminate or reduce existing debt before applying for a mortgage. The less debt a borrower has relative to their income, the more likely a lender is to respond with a lower rate offer.

A Historic Opportunity to Save Potentially Thousands of Dollars on Your Mortgage

Chances are interest rates won’t stay at multi-decade lows much longer. That’s why it’s crucial to act today, whether you want to refinance and lower your mortgage payments or are ready to pull the trigger on buying a new home.

Ascent’s in-house mortgage expert recommends this company find a low rate – and in fact, he’s used them himself to refi (twice!). Click here to learn more and see your rate. While this does not influence our product opinions, we do receive compensation from partners whose offers appear here. We are by your side, always. See The Ascent’s full announcer disclosure here.

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