The Federal Reserve’s target interest rate is the federal funds rate. It is the rate at which banks charge each other for overnight loans. The Fed changes this rate to influence economic activity and inflation.
The Fed’s decision is important because it affects the rates that banks charge for loans. That includes auto loans, mortgages, and credit cards. When the Fed raises its target rate, mortgage rates usually rise — which means higher monthly payments for borrowers with adjustable-rate mortgages (ARMs).
Here Is What the FED Fund Rate Increase Means for Mortgage Rates
Increased Mortgage Rates
Mortgage rates are an important factor in the housing market because they affect how much money it will take to buy a home. The higher the interest rate on a mortgage, the more money you will pay each month toward your home loan.
Interest rates on mortgages and other types of loans are based on the Federal Reserve’s decision to raise or lower its target for the FED fund rate.¹ The target is an interest rate that commercial banks such as Bank of America, Chase, and Wells Fargo pay to borrow money from each other overnight.
Fewer Home Sales
Each time the Federal Reserve raises its target for the federal funds rate, mortgage rates go up because people have to pay more to borrow money.² When this happens, they may decide not to buy homes or make larger down payments so they can afford higher monthly payments. It means fewer home sales, which can be bad news for real estate agents who sell homes!
Increased Adjustable Rates Mortgages (ARM)
Rising mortgage rates are a concern for home buyers who are trying to secure financing before interest rates continue to rise. The rates also affect homeowners who have adjustable-rate mortgages (ARMs), which have lower introductory rates than fixed-rate mortgages. When interest rates go up, ARMs tend to increase — sometimes significantly.
When the Fed raises its target interest rate, it makes it more expensive for banks to borrow money from each other which raises their borrowing costs. Banks pass these higher costs onto consumers through higher interest rates on credit cards and auto loans.
The banks also pass on this expense to their customers. This can be in the form of higher mortgage rates when they renew their existing loans. It can slow down home sales because prospective buyers may not afford a larger loan or down payment on their next home purchase.
About FED Fund Rates Increase on Mortgage Rates
The Federal Reserve (the Fed), the central bank of the United States, is a government agency whose main purpose is to create and maintain monetary policy. The Fed sets short-term interest rates by adjusting its target for the federal funds rate. As such, the target federal funds rate is a benchmark for other interest rates, including mortgage rates.
“About Mountain West Financial and the CalPATH Home Loan Program
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You may contact our CalPATH Hotline @ 800-310-7577, seven days a week from (8:30 am to 8:00 pm) or visit our website @mwfdirect.com. A CalPATH advisor will be standing by to answer (any & all) questions you may have about the home buying or refinance process.
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Links to Sources Used
- What the FED’s rate increase mean for mortgages. https://www.nytimes.com/2022/06/15/business/economy/fed-rate-increase-mortgage.html
- What the Federal Reserve does. https://www.bankrate.com/mortgages/federal-reserve-and-mortgage-rates/