Sometimes, even significant changes to federal policies or standards don’t affect most people’s everyday lives. Sometimes, the effects trickle down slowly over time. Then, there are interest rate hikes, which are typically felt quickly in ways that directly impact consumers.
Last week, the Federal Reserve raised its target federal funds interest rate by a quarter percentage point (.25) from near zero. This was the first increase in the benchmark rate in three years. And all indications are that it’s just the beginning.
What is the Fed rate?
The federal funds rate is the interest rate at which banks borrow and lend to each other overnight. It’s not the rate your clients would pay to buy a home or a car, but the Fed’s moves on this rate still affect the borrowing and saving rates your clients see every day.
The one-quarter percent increase doesn’t seem like much, right? Unfortunately, it’s enough for your clients to at least notice it right away. And, it’s just a preview of things to come. In addition to last week’s rate hike, the U.S. central bank’s policymakers hinted that six more rate increases could come by the end of this year.
That means that the cumulative effect of these rate hikes will impact the economy and, ultimately, your clients’ household budgets. But here’s the real question you probably have – will these moves make it harder for my clients to buy a house.
The answer looks like a solid yes.
Effects on mortgage rates
While mortgage rates do not match the federal funds rate (Fed rate), they do typically follow the yield on the 10-year Treasury. After the Fed announced the hike last week, the 10-year Treasury yield spiked as high as 2.246 percent – its highest level since May 2019. So, because the economy and inflation influence mortgage rates, it stands to reason that mortgage rates will continue to rise.
The average 30-year, fixed-rate mortgage is currently above 4 percent. But let’s see what would happen if the rate nudged up even a half-percentage to 4.5 percent?
- A $300,000, 30-year, fixed-rate mortgage loan would cost your client $1,432 a month at a 4 percent rate. If they paid 4.5 percent instead, the same loan would cost them $131 more per month. That equals another $1,572 each year and $47,160 over the lifetime of the loan.
Because of the competitive market, your home buyers may already know they are likely to pay more for their next home. But buying at a higher purchase price and higher interest rate is a double whammy they’d like to avoid.
How can you help them make the best of a challenging situation? Here are some strategies you can share with them.
Move quickly to lock in your rate
If your client has already signed a contract to buy a home and has locked an interest rate, they’re in good shape. Their lender can’t raise the rate. But if they’re shopping for a home right now or plan to this year, they should get moving.
Mortgage interest rates may be higher by the time they find a home, make an offer, and get a purchase offer accepted. They can’t lock an interest rate until they have a contract to buy a home.
If mortgage rates rise significantly before they find a house, they may end up with a higher monthly payment or have to shop in a lower price range because higher interest rates will weaken their buying power.
Shop around for a mortgage
Shopping around for many things – cars, electronics, clothing – typically pays off. The same goes for mortgages. Savvy mortgage shopping can help your client find a better-than-average rate.
Encourage them to do their research when looking for the right lender. They can save thousands of dollars by finding a lower rate or lower fees. But sometimes, even more important than that, they can find a lender they know offers excellent customer service and is willing to educate them on the process and answer all their questions.
Don’t be shy about recommending a lender who you know is easy to work with and that you know will have your clients’ best interests in mind during this challenging home buying market.
Start investing money
While the Fed has no direct influence on deposit rates, it does influence changes in the target federal funds rate. That means the savings account rate at some of the largest retail banks has been near rock bottom, currently a minuscule average of 0.06 percent.
It’s not going to happen quickly, but the expected series of Fed rate hikes could benefit your clients looking to grow the money they have in savings.
The higher federal funds rate may stimulate competition among banks and credit unions, and your clients may benefit from that. Their best bet is to look for options paying higher interest rates like money market funds, bond mutual funds, or bond exchange-traded funds. Some alternatives require more risk but come with increasing returns.
No doubt, the economy seems to be a mess right now. Gasoline costs an arm and a leg. Grocery prices are giving families sticker shock. Inflation and borrowing interest rate are increasing.
But despite the craziness, you can help your home buying clients find and finance the home of their dreams.
Jdickler. (2022, March 16). Here’s what the Fed’s rate hike means for borrowers, savers and homeowners. CNBC. Retrieved March 22, 2022, from https://www.cnbc.com/2022/03/16/heres-what-the-feds-rate-hike-means-for-borrowers-savers.html
Manfredi, L. (2022, March 17). Here’s how the Fed’s rate hike could impact mortgages. Fox Business. Retrieved March 22, 2022, from https://www.foxbusiness.com/economy/mortgages-federal-reserve-interest-rate-hike
About the authors: Virginia C. McGuire is a former credit cards writer for NerdWallet. Read more Kimberly Palmer is a personal finance expert at NerdWallet. She has been featured on the “Today” show and in The New York Times. Read more. (n.d.). What a fed rate hike means for borrowers, savers and investors. NerdWallet. Retrieved March 22, 2022, from https://www.nerdwallet.com/article/finance/federal-funds-rate-rising-interest-rates