The Federal Reserve raised the federal funds rate by 0.75 percentage point for the fourth time in early November, marking an unprecedented pace of rate hikes.
The benchmark short-term borrowing rate has been raised six times this year in an effort to cool down inflation, which is still near 40-year highs and causing most consumers to feel increasingly cash strapped.
The Fed noted in a policy statement that the “cumulative” impact of its hikes are being considered relative to determining future rate increases. Economists are hoping this
signals plans to “step-down” the pace of increases going forward, which could mean a half point hike at the December 13-14 meeting and then a few smaller increases in 2023.
What The Federal Funds Rate Means To You
The federal funds rate, which is set by the central bank, is the interest rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers
pay, the Fed’s decisions affect the borrowing and saving rates they see every day.
By raising rates, the Fed makes it more costly to use financing, causing people to borrow and spend less, effectively pumping the brakes on the economy and slowing down the pace of price increases.
“Unfortunately, the economy will slow much faster than inflation, so we’ll feel the pain well before we see any gain,” said Greg McBride, Bankrate.com’s chief financial analyst.
Already, “mortgage rates have rocketed to 16-year highs, home equity lines of credit are the highest in 14 years, and car loan rates are at 11-year highs,” said McBride.
How Higher Rates Affect Borrowers
Even though 15-year and 30-year mortgage rates are fixed and tied to Treasury yields and the economy, anyone shopping for a home has lost considerable purchasing power in part because of inflation and the Fed’s rate hikes.
30 Year Fixed Rate Mortgage Comparison For A $300,000 Loan
Dec 2021 Nov 2022
Rate / Payment Rate / Payment
3.11% / $1,283 7.08% / $2,012
That’s an extra $729 a month, an increase of $8,748 per year, and $262,440 more over the lifetime of the loan, according to LendingTree.
The increase in mortgage rates since the start of 2022 has the same impact on affordability as a 35% increase in home prices, according to McBride’s analysis.
“If you had been approved for a $300,000 mortgage in the beginning of the year, that’s the equivalent of less than $200,000 today.”
Interest rates for adjustable rate mortgages and home equity lines of credit are pegged to the prime rate, and will also eventually increase. Most ARMs adjust once a year, but a HELOC adjusts right away.
Meanwhile, consider boosting your emergency savings since savings rates have also increased. Sleep better at night knowing you have some money tucked away just in case.
Call me to discuss your options for a refinance or financing your next home!