Interest Rate Hike: What You Should Know

With the US economy improving, the Federal Reserve announced in December that it will be raising its key interest rate by 25 basis points, or in other words, 0.25%.  The last time this happened was in 2006 and many financial analysts agreed to the change.  The plan of the Federal Reserve is to raise rates gradually over the year at a slow pace.  There is uncertainty as to when, and by how much, the FED plans to increase the interest rate.  Much of that uncertainty has to do with how the low inflation will affect the economy.

But what does that mean?

Several economic segments will be impacted over time.

The most immediate impact will be on the credit cards and home equity loans offered by banks. Those rates are variable and so should rise quickly in response to the higher fed-funds rate. Savings accounts, however, are tied to market forces. With all deposits from the risk-averse they won’t need to lift savings rates to attract more deposits.

The hike, however, had virtually no immediate impact on mortgage interest rates since the market already had this priced in. Per Fannie Mae, the 30 year mortgage rates will drift .25% during the next year. Consumers and financial advisors ought to focus predominantly on affordable payments. Payment amount remains to be the important part of any loan structure and it is never wise to shop for a lone based on rate for which the market controls.

Discover your borrowing power.
The bottom line is that rates are still at historic lows and money is cheap for mortgage borrowers.

Written by: Luke Martin, Director of Secondary Marketing at Royal United Mortgage LLC
Published: 1/12/2016