Will the upcoming Fed rate hike mean higher mortgage rates?

Posted by  on May 19, 2015

Q: All the investment programs I watch on TV say the Fed is going to raise rates soon. When they do, will that send mortgage rates higher?

A: Not necessarily, but if you have been contemplating getting a mortgage -- whether it is to buy a house, refinance an existing mortgage loan, or tap into home equity -- now would be a good time to do it.

In an effort to reduce the shock to financial markets that would come with a rate increase, the Fed has been broadly signalling that the time to raise interest rates is drawing closer. Remember, though, that the Fed funds rate is a very short-term interest rate that does not directly impact long-term rates like mortgage rates.

Actually, the Fed policy change which might have had a more direct impact on mortgage rates was when they phased out of their quantitative easing program. However, though mortgage rates jumped temporarily, they soon subsided back below 4 percent.

A couple of things have helped keep rates low. For one thing, inflation has been literally non-existent over the past year -- the CPI was virtually unchanged for the year ending February 28, 2015 -- which gives mortgage companies more of a rate cushion over inflation. Also, interest rates in Europe are extremely low, which has helped fuel demand for US bonds and kept long-term rates down.

In some ways, you could say that everything up to this point has lined up in favor of low mortgage rates -- and that may be all the more reason not to miss this opportunity to benefit from those rates. The prospect for higher mortgage rates is raised not so much by the possibility of the Fed raising rates as by what that policy change would represent. It would signal a switch in the Fed's priority from worrying about low growth to worrying about rising inflation; and if they are right, that could very well mean higher mortgage rates.


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