As you’ve likely seen on the news, the Federal Reserve Board of Governors (the Fed), in an inﬂation-ﬁghting measure, announced increases in its federal funds rate in March and again in May. More increases are planned before the end of the year.
Federal Reserve Chair Jerome Powell said in a March 21, 2022, speech at the National Association for Business Economics Conference that “inﬂation is much too high, and the central bank will take the necessary steps to ensure a return to price stability.”
While the Fed does not directly drive mortgage rates, these rate increases have a cascading effect that ﬂows through to everything from credit cards to auto loans and how much you pay for your home loan, reﬁnance loan or home equity line of credit.
What is the Federal Reserve and what does it do?
The Federal Reserve sets borrowing costs for shorter-term loans in the U.S. by moving its federal funds rate, which governs how much banks pay each other in interest. And since mortgage lenders track the 10-year Treasury rate, when that rate goes up, mortgages tend to do the same. In addition, the Fed also inﬂuences mortgage rates through monetary policy.
How this affects you.
So, you may be asking yourself – what do Mr. Powell, the Fed and the 10-year Treasury rate increase mean to me? Even if you don’t follow ﬁnancial story lines, understanding what happens when the Fed raises rates can help you make smarter ﬁnancial decisions when it comes to your home loan options. Let’s look at some of these situations.
If you already own a home or have already signed a contract to buy a home and have locked in an interest rate, you’re in good shape. The lender can’t raise your rate. However, homeowners with adjustable-rate mortgages may see their rates rise, because they tend to move in the same direction as the federal funds rate.
Homeowners with HELOCs.
Homeowners who took out a home equity line of credit (HELOC) to consolidate debt, make home improvements or fund a major purchase may see their interest rate go up with the Fed’s rate increase – and by the same amount. For example, when the Fed increases the rate by a quarter of a percentage point, the rate on a HELOC usually follows within a billing cycle or two. However, since interest rates on HELOCs tend to be lower than credit cards and personal loans, home equity will continue to be a viable option even with a rate increase. And some banks, including PNC, offer the option to lock in a ﬁxed rate on a HELOC. Call or visit a branch for details.
Reﬁnancing? Here’s what you should know.
Homeowners looking to reﬁnance may ﬁnd it more difﬁcult to get into a lower interest rate to decrease their monthly payments unless their current rate is still higher after the rate increases. That said, with home values rising, you may be able to get more money out of your home if you’re considering a cash-out reﬁnance – even if higher rates could bring higher monthly payments. And even with the Fed’s increases, rates are still relatively low, so it may still be a good time to take advantage of the lower rates and their related ﬁnancial beneﬁts.
Looking for a new home?
If you’re shopping for a home this year, mortgage interest rates might be higher by the time you decide to purchase. Remember, you can't lock in an interest rate until you have a contract to buy a home. If mortgage rates substantially rise before you ﬁnd a house, you may end up getting less house for more money. Also, consider ﬁxed-rate products to take advantage of the current rate and hedge against future rate increases. You may also ﬁnd a 7-year adjustable-rate mortgage as a viable option, as it locks in your rate for 7 years and you may weather the storm of rate increases. That said, don't rush to buy just because mortgage rates are rising; always consider your personal and ﬁnancial situations.
The bottom line.
With rates on the rise, you should pay attention to the Fed and the economy. The good news is rates are still historically low, so make sure to shop around so you get a rate that suits your budget and goals. If you’re in the market to buy a new home or reﬁnance – even later this year – it’s a good idea to consult with a mortgage professional and gather information based on market predictions and your speciﬁc situation.
PNC is a registered service mark of The PNC Financial Services Group, Inc. (“PNC”). All loans are provided by PNC Bank, National Association, a subsidiary of PNC, and are subject to credit approval and property appraisal.
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