“Are interest rates going to increase for home loans? Is now a good time to buy a home?” Buyers often ask these questions because the higher interest rates rise, the more your purchasing power is diminished. Conversely, if interest rates were to decrease, you may be able to buy a more expensive home. However, have you ever wondered how interest rates are determined? By knowing what influences rates, you will be able to make a more educated decision when it comes time to buy a home. Here’s what happens.
The Federal Open Market Committee (FMOC) is a 12 person subcommittee of the Federal Reserve. This subcommittee is led by Federal Reserve Chairwoman Janet Yellen. FMOC is best known for determining what the Fed funds rate will be. What’s interesting is the Fed funds rate has nothing to do with mortgage rates. Rather the Fed funds rate determines what interest rate the Federal Reserve charges banks to borrow and lend overnight funds to each other.
A change in the Fed funds rate has a ripple effect on the prime rate. This is the interest rate banks charge their most creditworthy clients. On average the prime rate is about three percentage points above the Fed funds rate. If the FMOC increases the Fed funds rate, the cost of money increases. This, in turn, affects interest rates in industries ranging from credit cards to home loans. The Federal Reserve does not dictate what interest rates will be on a home loan. Instead, a subcommittee determines the Federal funds rate. This influences the prime rate which in turn influences interest rates on home loans.
To concretely determine what interest rates are going to do is like trying to pin smoke to a wall; it’s not possible. However, there are factors that influence where interest rates are headed. The most popular indicator is NOT the Federal Reserve; it is when the FMOC increases the Federal funds rate. Now that you know what has the largest effect on mortgage rates, the question remains “With current interest rates is now a good time to buy a home?” If you are thinking about buying a home within the next 12 months I suggest you contact your local Realtor today. A Realtor can provide you with relevant local market information and suggest quality lenders.
While no one knows definitively where interest rates are headed, they appear to be increasing. The FMOC has adjusted the Fed fund rate twice this year alone. To put that into perspective, in the first half of 2017 the FMOC increased interest rates by the same amount it raised rates the last 8 years. They chose not to increase rates in their most recent meeting, but there is speculation they will raise rates in December. This means the time to act is now. Contact a Realtor and get on the path to homeownership today before interest rates increase again.
