Why Homebuyers Shouldn't Fear the Fed Just Yet


Good news for prospective homebuyers. Even though the Federal Reserve indicated the central bank may raise interest rates twice this year, chances are mortgage rates won’t move dramatically higher anytime soon.

“Mortgage rates aren’t going to run away from prospective buyers,” says Greg McBride, chief analyst at Bankrate.com. “Buyers can rest easy.” He points out that rates have fallen this year and are more likely to move above the 4% level based on stronger economic news rather than speculation about Fed policy changes.

In fact, at current levels, rates are below where they started the year and as the Fed raises rates, if it raises rates, mortgage rates will follow but slowly. Mortgage rates are tied to the long end of the Treasury yield curve, not to short-term rates.

However, adjustable rate mortgage holders should be considering their options. That’s because ARM rate adjustments could pose an ugly surprise for people with loans set to adjust in the next year or two. Rate hikes will flow right through to the reset. If the rate on a $200,000 loan rises by half a percent, the payment hike will be nearly $60 per month.

There’s less room to maneuver for credit card holders. That’s because credit card issuers typically raise rates in lockstep with the Fed. With average rates nearly at 16%, a move could be an ugly surprise for people who rollover balances. The good news for people with good credit is that they can roll over the debt to a burgeoning number of zero percent credit card offers and avoid the hike. (Be sure to watch for fees on the rollover balance, however.) if you’re credit is not good, you may not have access to these low offer cards.

Despite the expectation that the Fed could raise rates later this year, savers still aren’t getting a break. Certificate of deposit and money market fund rates are still in the basement. “We’re not seeing any action there now,” says McBride.