While the Federal Reserve does not directly control the prime interest rate, many banks and lenders set their rates based on the target level of the federal funds rate. This prime interest rate is used by banks to set interest rates for interbank exchanges as well as personal loans, auto loans and mortgages. Typically, for variable rate loans, the interest rate will be the prime rate plus a certain percentage, meaning that the interest rate will vary according to the current prime rate. Fixed interest rate loans follow a similar pattern but will vary based on the interest rates available when the loan is originated.
The Federal Reserve recently raised their target rate by 0.25% and they are expected to raise it again within the year. This is in line with what experts predicted, so it is unlikely to immediately cause a huge shift in mortgage interest rates. However, mortgage interest rates have been steadily increasing over the last few years. Contrary to popular belief, the rising interest rates actually spell good things for the housing market. Even considering the fact that interest rates are rising, they are still very low when compared to the historical averages.
The rising interest rates have the potential to make many first-time home buyers jump into the market sooner rather than later. This will help to boost home sales throughout the spring and summer. This increase in sales will help to raise home prices and boost the economy as a whole. More sales will drive the market and increase revenue for the housing market as a whole.
Another positive effect of the rising interest rates is that higher interest rates usually mean lower standards for mortgage lenders. Higher interest rates give lenders a little bit of a cushion, increasing their overall profits and partially mitigating the risk of a client defaulting. Higher interest rates will also reduce the number of people looking to refinance their homes. Thousands of people have refinanced their homes in the last few years, but this is expected to drop off as interest rates rise this year. Since banks will be losing out on potential customers looking to refinance, they will be more motivated to find and work with new buyers looking to get a mortgage for the first time.
The United States economy as a whole is doing well right now, meaning that many families have stable employment and a constant source of income – something that is very important to most lenders. This puts a lot of buyers into an unprecedented position to purchase real estate. The combination of motivated buyers who are ready to purchase a home and relatively low interest rates is likely to boost home sales throughout the spring and summer of this year.
