How the Federal Funds Rate Is Blowing Up Mortgage Rates
By Maggie Wilson @ Real Estate Daily
April 2, 2018

The Federal Reserve has made the decision to raise the federal funds rate to 1.75%, which is the highest it has been since 2008. Although the mortgage rates don’t always change along with the federal funds rate, they are projected to increase for the next few years.

Those who are planning on buying or selling a home in the future should expect higher mortgage rates and plan their budget accordingly. The increasing rates will be a challenge for first-time home buyers who should look into applicable financing options like FHA loans. This will have an impact on who’s buying homes and how they’re buying them.

Key Takeaways

  • The Federal Reserve raised the federal funds rate, which has lead to an increase in mortgage rates that will continue over the next few years.
  • The economy is said to be doing well given that millions of jobs have been added within the last year, the unemployment rate is still low, and workers’ wages are continuing to gradually increase.
  • Mortgage rates are expected to be somewhere between 4.7% and 5.9% by the end of the year. Buyers should prepare their budget for higher mortgage rates and try to take advantage of any opportunity where the rates trend lower.

Excerpt

It’s the beginning of a new era at the Federal Reserve: New Chairman Jerome Powell opened his first meeting on Wednesday and, against the backdrop of an improving economy, lifted its key interest rate to its highest level since the housing crisis.

The Fed raised the federal funds rate (the interest rate at which banks lend to one another overnight) from 1.5% to 1.75%, the highest level since 2008. In addition to the anticipated rate change, Powell offered clues about what is in store for the economy and housing market in the months ahead.

We know the economy is doing well. With nearly 2.3 million jobs added in the past year, 300,000 of them in the past month, and the unemployment rate holding at 4.1%, a low not seen since 2000, jobs are plentiful. At the same time, workers’ wages are rising, but not at a fast pace. Hourly earnings have not exceeded a 3% growth rate throughout the recovery, helping to contain inflation.

But if current trends continue and the federal funds rate will be 2.1% at the end of the year, then we can expect mortgage rates to fall somewhere between 4.7% and 5.9%. Unfortunately, this is a pretty big range and not all that useful. However, on the bright side, the spread has typically narrowed in periods of rising federal funds rates, meaning that mortgage rates are likely to move up, but not by quite as much as the federal funds rate.

View the original article at Realtor.com