Recently, the federal funds rate has been raised by the Federal Reserve. Though this may seem irrelevant to your life, it may affect how much you pay for your mortgage.
Let’s discuss first what the federal funds rate is. Then, we can talk about what it means for you and your home!
What it is
According to Zillow, the federal funds rate is “the interest rate set by the Federal Reserve Board (aka the Fed), which determines the rate at which banks borrow money from one another.” This translates to how lenders give loans, by informing them of the proper base rate and margin to offer.
How does this all affect a fixed-rate mortgage? It doesn’t! If you have a fixed-rate mortgage, you’re paying a higher interest rate to ensure your rate isn’t changing. However, there are some ways you could be impacted. You’ll have a higher rate if you want to refinance, get a mortgage on an additional home, or get a fixed-rate home equity loan.
How does this affect adjustable rate mortgages (ARMs) and home equity lines of credit (HELOCs)? ARMs begin with a fixed rate, but then transition into an adjustable rate, which can vary by the year. It is the adjustable rate that is impacted by the federal funds rate.
HELOCs are generally adjustable. The only way they would be fixed for any period of time is to have a fixed-rate advance.
The federal funds rate will affect your mortgage unless you have a fixed-rate mortgage. However, you might not see the change on your payments immediately. So if you see the fed has changed its rate, you should act swiftly and accordingly.