The last few weeks there has been quite a buzz surrounding the Federal Reserve’s decision to increase the Fed Rate. On March 15, 2017, the Federal Reserve (The Fed) increased their target rate from a range of .5 to .75 percent to a range of .75 to 1 percent. This is the third time the Federal Reserve has taken such action since the housing crises of 2008. Many people are left with certain questions such as: what exactly is the fed rate? What does this mean for me and my family financially? How does this affect my ability to buy a home? With all the uproar, and the pain of 2008 fresh in our memories, it can be unsettling if we aren’t clear about the issue.
So let’s bring some clarity.
What Exactly is the Fed Rate?
An article posted by Forbes provides a great definition to what exactly the Fed Rate is.
“The federal funds rate is a benchmark interest rate that determines how much it costs for financial institutions to lend to one another. When the rate rises, so does the cost of borrowing for banks. They may in turn pass their higher costs to consumers in the form of increased interest rates on credit cards, auto loans, mortgages and other types of financial products.”
Viewing the Fed Rate as banking institutions’ cost of doing business can also be helpful. Banks are in the business of lending money and charging an interest rate. Like any business, when their cost to provide that service goes up, it usually trickles down to the customers.
Why Would The Fed Raise Rates?
The Federal Reserve was created by congress to help keep the US financial system safe, flexible, and stable. In an attempt to curb inflation, The Fed typically will increase the Fed Rate when the economy is showing sign of growth and strength.
The recent cause for the Fed Rate hike was no different. Because the economy is showing strong employment rates, economic growth, and market confidence The Fed deemed it necessary to raise rates. Overall, this is a good sign for the strength of the US economy.
How does the Fed Rate Affect Me?
Typically, a rise in the Fed Rate means a rise all other interest rates associated with lending institutions. Most banking instruments that have a variable interest rate will see a rise in that rate. These instruments include credit cards, personal lines of credit, and home equity lines of credit. Also, saving accounts will usually see an uptick in the interest being paid out to them.
What About Buying a Home?
One of the other major lending instruments that the Fed Rate hike affects is mortgages. Mortgage rates, like other lending instruments, are typically tied to the Fed Rate. Consequently, the rates on mortgages will very likely be going up.
Although a rise in mortgage rates may mean that your dollar today will buy you less house than it could yesterday, interest rates are still at historic lows. There are still plenty of opportunities to get into a custom home of your dreams at an affordable price.
There have been many reports that The Fed could increase rates three to four more times this year. Therefore, the sooner you can get your finances in order and start building a home, the better.