In response to an economy that's apparently healthy and getting stronger, the Federal Reserve has voted to increase the federal funds rate twice so far in 2018. Many economists predict two more rate hikes before 2019, leaving consumers to wonder: What happens when interest rates rise?
The answer to this question is complex. It all depends on what types of debt you currently own, how much debt you plan on taking out, and your current financial standing. Here's what you should
know about how mortgages may be affected by changing interest rates:
How rising rates affect current home mortgage rates
The federal funds rate is very weakly tied to mortgage rates. In fact, there have been some instances in the past when mortgage rates have gone down after a rate hike, Bankrate reported. In today's climate, though, mortgage rates seem to be on the ascent. The year began with an average 30-year fixed mortgage rate interest of 3.95 percent, but as of the week ending July 12, they were averaging 4.53 percent, according to Freddie Mac's Primary Mortgage Market Survey. Mortgage rates averaged 4.03 percent during the same week in 2017.
How existing mortgages are affected by rate hikes
The potential impact that the Fed's decision to increase the federal funds rate depends on the type of mortgage you have. If you have a fixed-rate mortgage, nothing will happen; your rate will stay the same no matter what, as long as you don't refinance it.
If you have an adjustable-rate mortgage, though, you can expect to see higher interest rates, and therefore larger amounts due each month. ARMs typically begin with a short period of time with a fixed rate - this usually lasts three or five years. After that, the interest rate is recalculated annually based on current market conditions. If rates are increasing, the adjusted rate will likely be higher.
How homebuyers should respond to rising rates
If you know you're ready to buy a home, it may be wise to pursue a purchase quickly. However, speeding up the process isn't always doable or practical. If you're on the brink of buying a home, moving forward may be best; but if you're still saving up for a down payment, it might be better to save a bit longer so you can pay more upfront to keep your monthly mortgage payments low.
In some cases, buyers may have to review what they want from their home purchase and re-evaluate their budgets. That's because, as rates rise, borrowers will be expected to pay more each month. To keep their monthly payments well-suited to their budgets, they may have to borrow less to reconcile the higher interest payments.