A Simple Explanation of the Interest Rate Hike

Ok, so that’s all we’ve heard about for the past week.  What does it really mean to you?

First, here’s a quick explanation of what the Fed Funds rate means.  The Federal Reserve only controls one interest rate.  That’s the rate banks use to lend money to one another. It has not been raised since 2006 and it affects the Prime Rate. Credit cards and consumer loans (which include Equity Lines) are tied to the fed funds rate. It has nothing directly to do with Mortgage rates.

Credit Cards

Credit card rates will begin to raise immediately. Read your statements carefully to see what happens to your rates and switch cards if necessary.

Equity Lines

Equity Lines follow the Fed Funds rate and will begin to rise as well.

Mortgage Rates

Rates are lower than the day Fed Fund rate was raised.   Mortgage rates actually follow the longer term bonds. These rates have more to do with the Federal Reserve buying mortgage backed bonds.

Here’s what has been happening.  The Federal Reserve lowered the rate to nearly zero to stimulate the economy.  When that didn’t work, they started buying up long term bonds, most specifically mortgage-backed bonds. The capital used to purchase these mortgage backed bonds can stay in the system for a long time. Rates could well stay low for some time to come.

Conclusion:  Mortgage Rates shouldn’t shoot up but Equity Line rates could.  Best to either switch your equity line adjustable rate to a fixed rate or refinance and roll your 1st and 2nd (if it’s an equity line) into one fixed rate loan.

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