After Seven Long Years, Feds Raise Interest Rates

Floor of the NY stock exchange today. Photo by Richard Drew/AP

Floor of the NY stock exchange today. Photo by Richard Drew/AP

Today was the first time since 2008 that the U.S. Federal Reserve Board raised interest rates. This was no surprise as Speaker Janet Yellen had given us plenty of warning that it was coming, that the economy was strong enough to handle a rate increase. Rates increased by 0.25%.

Since the market is anticipatory, lenders had already built into their rates this expected increase. So why then have rates been so volatile this week?

Other factors, including the feeling of uncertainty in the marketplace, have influenced interest rates more than this move by the Feds. Investors can be jittery, and it may well take several more days for nerves to calm down.

SHORT TERM RATES ARE NOT MORTGAGE RATES

One important thing to understand is that the Feds did not raise mortgage interest rates. They raised short term rates, and a 30-year mortgage is not short term. Short terms rates, typically called money market rate and the treasury bill rate, affect credit cards, auto loans, and other short term loans.

If you are carrying credit card debt from one month to the next, now is a good time to stop using your credit card until you pay off that balance.

On the other hand, mortgage interest rates will be influenced by other factors, including the global economy.

While we could predict today’s short term interest rate increase (because the Feds told us it was coming), no one can consistently and accurately predict mortgage interest rates.

I continue to stand by these guidelines, which I have written about in my books.

GUIDELINES FOR LOCKING YOUR INTEREST RATE

  1. If you see a rate you like, lock in the rate and don’t second guess yourself.
  2. If you plan to stay in your home for less than seven years, look at the 5/1 ARM, because you will save money both in the beginning and overall.
  3. If you plan to stay in your house for the long-term, or if you cannot sleep at night without a “forever rate,” then take the fixed rate mortgage.
  4. If you are refinancing, you must consider the term (number of years) equally with the interest rate.

As always, thank you for stopping by my blog. For more information about today’s event, see the Federal Reserve Board Press release here.

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