We’ve been expecting another interest rate hike from the Federal Reserve and it just happened Wednesday, December 13. This was the third rate hike in 2017, but only the fifth since the 2008 financial crisis. All in all, the interest rates still remain historically low and the real estate market is strong with average home prices continuing to rise at a rapid pace.

What is Driving the Rate Increases?

The biggest reason for this latest Fed rate hike are easy to understand. The economy is doing incredibly well and that allows for higher interest rates in the lending industry. Here are some of the key economic factors driving this latest rate increase:

  • Lower unemployment numbers and more new jobs created in 2017
  • Increased spending by households
  • Bigger investments by businesses in the past two quarters

What is the Federal Funds Rate?

The Federal Reserve manages the Federal funds rate. This is the interest rate at which depository institutions (banks and credit unions) will lend reserve balances to other depository institutions overnight on a collateralized basis. This effectively helps determine interest rates for credit cards, mortgage loans and loans of all types. The federal fund rate currently sits in the range of 1.25-1.5%. Again, this is still historically low and favorable for borrowers.

Central bankers have kept up with a steadily growing economy. The Federal Reserve rate is a way to keeping the economy balanced. It goes up and down based on certain economic indicators. In late 2017, jobs have increased while inflation hasn’t increased as much as expected. The Fed’s goal was 2% inflation this year, but the numbers have fallen far short of that (roughly 1.7% as of this post). Some lawmakers wanted to hold off on this latest rate increase because of slow inflation, but the other economic indicators suggested otherwise—enough so to raise the rates now.

What Will Happen in 2018?

Economic experts predict the economy will continue to grow in 2018 and there’s a good chance that interest rates will rise again at least once during the year.

From a mortgage standpoint, it adds a sense of urgency to home buyers (and people looking to refinance) who are on the fence. We can never truly predict the future of the economy. If you are in position to buy now, it’s a good time to start taking action. Here are 5 steps you can take to prepare for a home purchase in 2018.

One additional note is for people who have home equity lines of credit (HELOCs). You will see your rate move up .25% in accordance with this latest Fed rate increase. For those looking to establish a new HELOC, the current rate is now 4.5%, based on the Federal funds rate.

If you have questions about how outside economic factors will affect your home loan or you want to get started with your new mortgage loan or home refinance application, call me today at (619) 929-0199.

 

 

Beau Hodson

Beau Hodson

About the Author Since 2003, Beau has been a mortgage professional and is a leading mortgage broker and lender in San Diego. As Founder and Senior Mortgage Advisor at Transparent Mortgage, he is truly committed to serving the needs of his clients and raising industry standards for integrity and transparency.