The Federal Reserve has raised the prime interest rate for the second time this year alone and the seventh time in the past two years. Not only is this the second rate increase this year already, but the Fed is also expected to raise the rate at least two more times before 2019. After meeting for two days, the Federal Open Market Committee held a vote for the increase its benchmark fed rate. This is the sixth rate increase in three years and moves the central bank further away from fiscal policies which helped America regain some momentum in the markets to recover from the recession a decade earlier. This rate increase comes on the heels of a strong economic outlook and the expected rise in GDP.
The prime interest rate or the benchmark rate is essentially the minimum amount of interest that federal lenders must charge on mortgages. This rate hike could play an important role for you if you were planning to buy a home this year.
This recent rate hike brings the current interest rate up to two percent, the highest we have seen since before the recession in 2008. Additionally, though, the interest rates are expected to jump up to two and a half percent by the end of the year. Given wages have not increased significantly, this could signal an economy that is out of balance and due for a correction since we currently have an exceptionally low unemployment rate and below four percent and interest rates are rising. Hopefully, wages will see a jump to compensate for inflation to prevent another downturn in the housing market.
If you already have a fixed rate loan this rate hike will not have a negative impact on your monthly budget.
Since adjustable-rate mortgages are subject to the current federal rate if you have an adjustable-rate mortgage or ARM which is past the fixed rate period you can expect to see a jump in your payments when your mortgage readjusts. It might be a good time to consider refinancing to a fixed rate mortgage with the prospect of rising rates due by the end of the year. The current rate of a 5/1 ARM is just above four percent, compare that to a rate just under three percent in 2015.
The biggest take away from this news is that rates will continue to increase in the foreseeable future and real estate prices are continuing to soar. On the one hand, more and more people are forecasting an increase in available inventory in the housing market and that construction of new homes will start with renewed vigor. If you are currently in the market for a new home, then it is a good time to lock in a lower interest before they expected to increase up to four percent by 2020. If you are looking to buy in a few years, then take a look at lease-to-own homes as an alternative to a traditional mortgage to lock in a lower price before you are priced out of the market.