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The Federal Reserve has raised the rates again. I think this is going to make mortgage payments tougher for all. What do you think?

Guest

I don't think the recent hike in rates is going to affect the homeowners who have fixed-rate mortgages.

blue · Posted: Thu Mar 30, 2006 12:45 pm Post subject:

The Fed's decision may affect people with adjustable rate mortgages and home equity loans. This hike will see increase in monthly payments for people with ARM and home equity loans.

Samantha · Posted: Thu Mar 30, 2006 12:51 pm Post subject:

Hi Micky,

As per Frank Nothaft, chief economist with Freddie Mac, this hike is not going to affect majority of U.S. homeowners who have long term fixed rate mortgages. As the long term loan rates are tied to the bond market, they are less affected directly by the changes in Fed's decision.

However the hike in interest rates by the Federal Reserve may indirectly affect those with adjustable rate mortgages. Increase in prime rate will also raise the rates for home equity loans as this rate is connected to Fed funds rate.

With 85% of single family homeowners in U.S. in the prime market having long term fixed rate mortgages, the recent hike is not going to affect majority of the home owners.

God bless you.

For MortgageFit,
Samantha

Bill · Posted: Fri Mar 31, 2006 9:40 am Post subject:

Micky,

Unfortunately, there are no simple answers when it comes to the direction of mortgage rates of interest. Conventional wisdom is that home loan rates will steadily increase throughout the rest of the year ... but not as a direct result of the Federal Reserve raising or lowering the Federal Funds rate.

The Fed Funds rate is the interest rate banks charge one another for extremely short-term loans. Banks make these loans to one another, sometimes on an overnight basis, to cover account shortfalls.

By raising the Fed Funds rate, the Fed is hoping that banks, in turn, will charge consumers and businesses more to borrow money, which should slow down the economy with the goal of keeping inflation under control. So, when the Fed increases rates, the immediate impact is that banks raise short-term interest rates for things such as automobiles, consumer loans and adjustable rate home equity lines tied to Prime - which usually moves lock-step with the Fed Funds rate.

Home mortgages involve a much longer time frame, up to 40 years. The interest rates on these loans are not tied directly to the Federal Funds rate or lending Prime rate, but based on long-term bonds that are heavily affected by inflation expectations, market liquidity, investment returns, etc.

Here's an example: Let's say the prevailing wisdom among lenders is that our economy will experience a lot of inflation in the next decade or so. In that case, lenders will want to earn a higher interest rate on long-term loans to counter the effects of inflation. That means interest rates on home mortgages will rise.

A better indication than the Fed Funds rate as to where long-term mortgage interest rates are going are Mortgage-Backed Securities (MBS). Trends in the MBS bond market do have a direct impact on long-term mortgage rates of interest and are watched closely by lenders. MBS fluctuate minute by minute just like the stock market ... which is why mortgage rates can actually change several times daily if the bond market begins jumping around.

While it is never welcome when mortgage rates do increase ... historically mortgage rates remain extremely low .. and rates should remain relatively low for the near term. The housing market has supported the economy for many years now while more American's have been able to better afford homes than anytime in history. There should not be any extreme concern that this will change any time soon.

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