In December, the great and powerful Fed bumped up interest rates by 1-1.5%, and mortgage rates are now at their highest level in four years. *cue scary music* Experts predict that rates will hit 5% by the end of 2018. But what does all this even mean? And who is this “Fed” guy, anyway?
The “Fed” is the Federal Reserve System, a government agency that oversees the country’s economic health. The Fed raises rates to keep inflation from getting too high. The rising interest rates are a sign that the economy is "lit" (as the kids are saying) which leads to higher inflation and a more profitable stock market – both of which are bad for mortgage rates.
So what does this mean for your mortgage rate? An increase in interest rates means you have less buying power. What the heck is buying power, you ask? Nope, it’s not a new super power. Simply put, it’s whether or not you are financially able to buy a home based on your own personal finances and the condition of the market that affects that ability, i.e. interest rates. When interest rates go up a percentage point, buyers can lose thousands of dollars in buying power. Think about it like this: for every $100,000, a 1% rate increase increases your mortgage payment by approximately $61 a month. If you wanted to buy a $500,000 home, a rate increase of only one percentage point could add almost $4,000 a year. That may not seem like a lot at first, but spread out over the course of a mortgage term, it sure might feel like a lot to your wallet.
Many experts advise locking in today's rates, which even though high, are still historically low. And the chances of a significant decline in rates are slim, so the longer buyers wait, the more expensive it will be to buy. Rates available now are likely the lowest we'll see in 2018. So what are you waiting for?