How will the Federal Reserve raising their target interest rate affect mortgage rates this year?
Since raising the interest rate by 0.25% back in December, many are questioning what impact this will have on mortgage rates.
In order to determine the rise and fall of mortgage rates, there are several factors that must be considered other than the target interest rate increase.
The 10 Year Treasury bond: while most mortgages are packaged as 30 year products, the average loan is either paid off or refinanced within 10 years. And, because banks finance most mortgage loans using government bonds as collateral, this makes for good measure. As the 10 year bond rises, mortgage rates will rise.
Inflation: as inflation increases, mortgage rates will also increase. While there is little inflation or risk of inflation, mortgage rates will generally stay flat or fall.
Supply and Demand: if there are more buyers than there are homes, rates will tend to rise.
Economic activity: lastly, home sales, consumer confidence, GDP, Consumer Price Index, are all factors in the rise and fall of mortgage rates. Good economic news can result in rising mortgage rates, while bad economic news can cause a decrease in rates.
Fannie Mae’s Chief Economist, Doug Duncan, expects 30 year fixed mortgage rates to drift from 3.9% to 4.1% over a course of the next year if the Feds continue to increase the interest rate to a full percentage point by the end of this year. To put this in perspective, a $225,000 mortgage payment would increase by a mere $26.00, not enough to slow down prospective home buyers.
As long as the Feds raise the interest rate gradually this year, it should not have a significant impact on mortgage rates. So, what are you waiting for?
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