The Federal Reserve raised the short-term interest rates on Wednesday for the second time in a decade and signaled that rates could continue to rise into 2017. What does this mean for mortgage rates and your buying power?
First of all, it's important to recognize that mortgage rates are not set by the Federal Reserve. The Fed sets the short-term benchmark interest rates, which are different from long-term interest rates applicable to mortgage loans. Mortgage rates typically follow the long-term bond rates, such those tied to the 10-year Treasury note. Long-term rates typically adjust before the Fed makes an adjustment. For example, mortgage rates have risen almost 60 basis points, or 0.60%, since the presidential election, a figure more than twice that of the Fed's 0.25% hike on Wednesday.
Importantly, the Fed signaled that it expects to raise short-term rates three times next year by a total of 75 basis points, or 0.75%. This means that mortgage rates will likely move higher before the Fed acts again. Economists predict that if the Fed carries out the three planned rate increases in 2017, mortgage loan rates could come close to 5% on 30-year fixed notes. Currently, Freddie Mac is reporting that 30-year fixed rates are averaging around 4.16%.
How does a rate hike affect your buying power? Take a look at this chart. As you can see, even slight increases in mortgage loan rates can have a big impact on your buying power.
If you're planning on buying this year, doing so sooner could have a big impact on what you can buy. Call us today!