Dec 14 2022

How to leverage the Fed rate increase

fed rate increase

What does another Fed rate increase mean for you? Find out if more mortgage rate hikes are coming.

You’ve probably heard: The Federal Reserve just okayed its seventh interest rate increase for the year. These aggressive and unprecedented rate hikes are intended to help bring down inflation.

You can read more about this here and here. As 2022 comes to an end, it’s possible that some of the largest rate hikes are behind us. Some economists even believe that the Fed may cut rates by the end of next year.

How will you be impacted by the Fed rate increase?

The Federal Reserve, otherwise known as the U.S. central banking system, began raising its benchmark rate in early 2022 in an effort to curb historic surges in inflation. When the benchmark interest rate goes up, it causes the cost of many types of borrowing to rise.

This is how you as a consumer may be affected:

Short-term -

  • ARMs. Adjustable mortgage rates will increase.
  • Bank accounts. Savings account rates may slowly rise, providing financial benefits.
  • CDs. Certificate of deposit payout rates may also rise, at varying levels.
  • Credit cards/car loans. Rates on auto loans and credit cards are likely to move higher.
  • HELOCs. Home equity loan rates may also gradually increase.
  • Stocks. The stock market typically performs well leading up to and the year after a Fed rate increase.

Long-term -

  • Fixed-rate mortgages. Though fixed mortgage rates usually move with the 10-year Treasury yield, a Fed rate increase can ultimately cause mortgage rates to rise.
  • Long-term bonds. Bond yields may decrease, typically inversely related to interest rate hikes.

The Federal Reserve raising its federal funds rate doesn’t affect mortgage rates directly. But it can set a chain of events into motion that has potential to trigger a mortgage rate increase.

The easiest way to tell what direction mortgage rates are heading in is to take a look at the 10-year Treasury rate and its five-decade history. The average span seen between these two numbers is 1.7 percent. The Treasury yield began to climb in 2022, bringing mortgage rates with it. The 10-year Treasury rate is projected to rise through the end of the year, and the same is expected for mortgage rates.

Could a rate lock provide you with peace of mind? Contact your local Academy Loan Officer to find out.

When will mortgage rates hit their peak?

Related to inflation and the Fed’s actions, mortgage rates have doubled* since the start of the year. This has caused the housing market to cool, decreasing purchasing power for today’s homebuyers.

“Although the Federal Reserve doesn't set up mortgage rates, a higher rate for banks typically makes borrowing more expensive… These higher mortgage rates will affect many homebuyers, especially first-time homebuyers,” Nadia Evangelou, National Association of REALTORS® (NAR) Senior Economist and Director of Forecasting, says.

While higher rates can seem alarming—especially if you’re hoping to buy a house—it can help to put it in perspective:

  • Even with today’s rising rates, mortgage rates are still below the historical average.*
  • In contrast, rates peaked in the 1980s, climbing to some of their highest points.

Thankfully, there does appear to be an end in sight. High inflation contributes to higher mortgage rates. But after the Fed’s sixth rate increase, inflation began to show signs of slowing. For the mortgage market, this comes as potentially welcome news.

“The housing market is expected to face continued uncertainty heading into 2023 as consumers, financial markets, and policymakers work through their respective challenges in today’s economy… We are watching for any additional stability in the MBS market, signs of cooling inflation, and/or less aggressive Fed action to give us confidence that mortgage rates are past their peak,” Ali Wolf, Zonda Chief Economist, explains.

To summarize: As the Federal Reserve sees success in controlling inflation, mortgage rates may follow suit. While no one can predict exactly when, mortgage rates are likely to moderate, giving many homebuyers the chance to reenter the market.

In the meantime, some buyers are utilizing strategies like rate locks, which lock in a mortgage rate for a set time to help buffer market fluctuations, and Temporary Buydowns, used to lower a mortgage rate for the first few years of homeownership, to help overcome affordability challenges. Low and no down payment mortgages can also help to reduce or eliminate some of the upfront costs of buying for homebuyers who qualify.

Are you ready to reenter the market?

Consulting with a local Academy Loan Officer can help you find out when the time is right. There may be affordable mortgage options available to you today, or you might see more savings by waiting a few months to purchase. Get in touch with your Academy Loan Officer and get personalized guidance.

This is for informational and educational purposes only and not intended as an advertisement as defined by Regulation Z. Please consult a trusted professional as personal circumstances may vary. No specific results are guaranteed. MAC1123-1484260.