If you’re currently shopping around for a mortgage, you’ve no doubt noticed the Federal Reserve increased its key interest rate again recently. It is widely expected to execute another (possibly even more significant increase) at its September 20-21 meeting. This guide on what FED rate increases mean for mortgage rates will help you understand how these rate hikes affect the market and why they will impact your mortgage rate shopping.
What Is The Fed?
The Federal Reserve, or FED, is the American equivalent of the Central Bank. It holds the levers of control for the American Economy. The FED operates independently of other branches of government, but it’s responsible to Congress. The Federal Reserve Board has twelve voting members and seven non-voting members. These include two Presidents, who are also chairmen of the Council of Economic Advisers (CEA), four representatives from industry (presidents or chairmen), and three regional Federal Reserve Bank presidents.
Why Are Interest Rates So Important?
When interest rates go up, this means that you have to pay more to borrow money from the bank. This may seem like it only affects people who take out home loans, but this is not the case! When you think about how higher interest rates affect everyone, you must also consider that when they go up, they make everything else cost more too.
How Do Interest Rates Change?
Although there is no direct correlation, we all know that the mortgage interest rates for a home loan go up and down with fluctuations in the FED rate. This is because, when the FED increases its key rate, the monthly payments for everyone tend to go up. The reason behind this phenomenon is quite simple. When it’s time for lenders to decide what mortgage interest rates are going to be for the month, a company looks at how much they can borrow from other banks. With an increase in the FED overnight lending rates, there will be less money available for borrowing so the average borrower will have to pay more to get access to capital. The Federal Reserve Board has been raising its key interest rate in an attempt to fight the rampant inflation numbers we have been seeing recently.
What Impact Does That Have On Mortgage Rates?
Again, while there is no direct correlation, interest rates are closely tied to the FED rate, higher rates will lead to higher mortgage rates. When the FED raises its overnight rates, mortgage rates typically increase as well. That’s because banks base their own loan policies off of the FED’s policy. When the two correlate positively, it can be good for borrowers but when they correlate negatively, it can hurt homeowners who take out loans.