Last week, the Federal Reserve voted to hold key interest rate at current levels. Nevertheless, three board members voted for a rate hike, and Fed Chair Janet Yellen has said the “case for an increase in the federal funds rate has strengthened in recent months.” The decision came as a surprise to some economic observers who were expecting a small hike in interest rates. The Federal Reserve’s decision is good news for homebuyers and those looking to refinance at a low rate. If you are a potential buyer on the fence about purchasing a new home, your window of opportunity to lock in a great rate may be starting to close.
The federal funds rate is the interest rate by which banks lend money to each other, which the Federal Reserve uses to impact the amount of money in circulation. In turn, this rate effects how expensive it is for consumers to borrow money to buy houses, cars, and other large purchases. Even a small quarter-point rate hike can lead to a sizable difference in interest paid by the borrower over the term of a thirty-year mortgage.
The federal funds rate has been near zero since the recession hit in 2008. In December of 2015, the Federal Reserve raised the federal funds interest rate a quarter point. This was the first rate hike in nearly ten years. Now, nearly a year later, we face a strong possibility of a December 2016 rate hike. According to Reuters, a recent poll of over one-hundred economists showed a 70% chance of a December rate hike. However, according to the same Reuters article, “markets are pricing the chances at under 40 percent.” A rate hike could theoretically come in November, but the chances are very slim since the decision to raise rates would have to be made days before the Presidential election.
The Fed’s decision to hold interest rates at current levels was not a unanimous decision, however. Three members of the Federal Reserve’s ten person policy panel voted for a small increase in rates. Also on Wednesday, observers noted a flattening yield curve, which signals that investors are anticipating a near-term rate hike. The Federal Reserve cited below-target inflation (1.1% actual versus 2.0% target) and discouraged job seekers reentering the labor force as reasons to keep rates low.
While a rate hike will make buying a home more expensive, there are some surprising benefits to a rate hike. Savings accounts and other low-interest savings vehicles like Certificates of Deposit will see a greater return on investment. This could help retirees and senior citizens who hold their money in safe investments. Higher interest rates could also improve the stock price of various banks and financial institutions who benefit from higher interest rates.
If you are considering buying a house, or looking to refinance at a lower rate, now is a great time to act. Interest rates are still historically low, but may rise in the near future. If you need an experienced attorney to help with all your real estate needs, including closing on your house or refinancing, contact us today.