The Chairwoman of the Federal Reserve, Janet L. Yellen, has stated that the planned increase in interest rates would be done very slowly, with the first expected to be just a 0.25 percentage point increase. She further stated that it will likely take several years to get back to a normal rate, which is about 3.5 to four percent. However, even this small upcoming uptick has had an effect on the home buying marketplace. Since just a half of a point increase can represent an additional $50,000 towards the total cost of buying a home, many people are moving to secure lower rates while they are still available.
The Fed hasn’t raised interest rates since 2006, and the rate has hovered around zero percent since 2008. While this has been a boon to the housing market, it has harmed people who save money or live on a fixed income; since 2012, five-year CDs have had interest rates that were below one percent.
Mortgage interest rates are expected to increase along with and sometimes in advance of the Fed’s raising the rate. Some home loan rates have already begun to rise in anticipation of the increase because long-term rates tend to reflect expected financial trends.
According to the chief financial analyst at Bankrate.com, when the Fed raises the rates, it raises the cost of money for businesses, consumers and the government. Although there are other factors than interest rates that affect mortgage rates, the Fed’s rates are a representation of the overall economic climate.