Interest rates can affect many aspects of your financial life and are driven by the monetary policy decisions of the Federal Reserve. Major banks use these monetary policy decisions when borrowing or lending funds.
The Federal Reserve has recently agreed to raise its key interest rate of 1.25% to 1.5%. This marks the third increase in this rate this year. The raised rate will push up rates for credit cards, adjustable-rate mortgages and home equity lines of credit. Its effect on fixed-rate mortgages will not be as pronounced.
Mortgages typically come with 15 to 30 year terms which is far longer than short-term borrowing affected by the federal funds rate. Therefore, mortgage rates which have been below 4 percent for the majority of 2017 are not as sensitive to the incremental rate increases.
How the Interest Rate Increase Will Affect Individuals Seeking a New Mortgage and Owners With An Adjustable Rate
The individuals that are most vulnerable to this rate increase are those who are seeking a new mortgage or already have one with an adjustable rate. If you have an adjustable rate mortgage, the rising interest rates may affect your rate when your introductory period ends.
You may want to consider refinancing your adjustable rate mortgage to a fixed-rate one without extending the term of it. Opting for a 15-year fixed rate mortgage may also decrease the total amount you pay in interest.
In addition, if you’re considering buying a multifamily property through a new mortgage, you should expect an interest rate for a 30-year mortgage to rise to about 4.40 percent, up from the current 3.95 percent rate.
How the Interest Rate Increase Will Affect Rental Property Owners
If you own rental properties, the rate increase may help you out because more people will be tempted to rent rather than buy a home. Increases in occupancy and rental rates can increase the value of your real estate.
By doing whatever you can to keep your interest payments low and paying off your debt as soon as possible, you can ensure that increased interest rates have a less drastic effect on your financial situation.