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How Fed Rate Hikes Impact Borrowers

Fed RateAs the Federal Open Market Committee (FOMC) gets ready to meet on Tuesday, a survey by WalletHub showed that 91.3 percent of Americans expected an interest rate hike at the conclusion of the meeting. WalletHub conducted a nationally representative survey to see what people know about the Federal Reserve interest rate increases and how they impact their wallets.

In terms of mortgage rates, the survey found that even if the Fed raised interest rates, there wouldn’t be much of a change in mortgage rates as the markets have already accounted for the move.

Being already accounted for isn’t the only reason that mortgage rates might not see an increase. According to Tendayi Kapfidze, Chief Economist LendingTree, “Mortgage rates, particularly fixed interest rates, are determined by the supply and demand for longer-dated securities. In this regard, another action that the Fed is taking does have an impact on mortgage rates.”

The action that Kapfidze refers to is the Fed’s plans to normalize its balance sheet by lowering holdings of Treasuries and mortgage-backed securities. The plan will “reduce demand for these longer-dated securities and will apply some upward pressure on interest rates over time,” Kapfidze said.

How much more expensive could mortgage get if rates rise again? According to estimates by the analysts at WalletHub, the last rate hike increased the cost of new mortgages by seven basis points and the Fed has cost homebuyers with an average loan of $230,984 roughly $42,000 since the start of 2015. This, if one assumes “the 88-basis point rise in the average APR on a 30-year fixed-rate mortgage from January 2015 to March 2018 is due solely to the six Fed rate hikes that have occurred since then, as well as the upcoming ones,” WalletHub said.

According to Kapfidze, though lenders don’t raise rates as the same pace and borrowers could benefit by shopping around to “mitigate the impact of rising rates on their cost of borrowing,” variable rate mortgage products would be affected by the rate hikes.

“Adjustable rate mortgages (ARMs) and home equity lines of credit (HELOCs) are based on short-term rates, which will be impacted by the increase in the Fed funds rate,” Kapfidze said. “It will increase with the Fed hike, and since most HELOCs are tied to this rate, borrowers will see an immediate increase in their interest rates.”

The WalletHub survey found that while 50 percent Americans actually thought mortgages become more expensive after a rate hike, only 10 percent of those people have variable-rate mortgages.

About Author: Radhika Ojha

Radhika Ojha, Online Editor at the Five Star Institute, is a graduate of the University of Pune, India, where she received her B.A. in Commerce with a concentration in Accounting and Marketing and an M.A. in Mass Communication. Upon completion of her master’s degree, Ojha worked at a national English daily publication in India (The Indian Express) where she was a staff writer in the cultural and arts features section. Ojha also worked as Principal Correspondent at HT Media Ltd and at Honeywell as an executive in corporate communications. She and her husband currently reside in Dallas, Texas. You can contact her at Radhika.Ojha@theMReport.com.

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