It’s a big day for the US economy. The Federal Reserve, as expected, just announced it’s raising its benchmark interest rate by a quarter point, the first hike since 2006.
For the full implications of the Fed’s decision, see Quartz’s comprehensive explainer from Tuesday (Dec. 15). But right now let’s narrow the focus: What does an increase in the federal funds rate mean for your mortgage?
If you’re a home owner with a standard 30-year fixed-rate mortgage:
Nothing! That’s the beautiful thing about the “fixed rate” part.
If you’re a home owner with an adjustable-rate mortgage.
Right now, the share of adjustable-rate mortgages in the US market is near a record low—around 5%, according to data from the Federal Housing Finance Agency. That’s a steep decline from the mid-aughts, when ARMs accounted for 50% to 60% of the market.
Back in 2010, the New York Fed theorized that the share of ARMs might have plunged during the financial crisis because people became suddenly aware of high default rates on subprime ARMs, not to mention generally more risk averse. A separate hypothesis was that, with long-term interest rates already low compared to short-term ones, people simply preferred taking on fixed-rate mortgages.
The point is that a Fed rate hike would have been a bigger deal for the mortgage market several years ago, when ARMs made up a much larger share of the entire universe of US home loans. That said, ARMs are generally linked to short-term interest rates. If you do have one, whether you see an impact from the Fed’s decision will depend on what phase of your mortgage you are in. Most ARMs come with an initial fixed-rate period. If you’ve already cleared that, expect to pay slightly more.
If you’re still thinking about buying a home.
Sorry, but you might have missed the boat on getting the lowest-possible rate. Then again, the markets really priced this rate hike in a few months ago, so actually you missed the boat a while back.
But if you want to feel better, you should look at the big picture. Even if moves by the Fed push up mortgage rates a bit, they remain quite low by historical standards. In fact, rates have been crazy low since the Great Recession (though banks have become more selective about who they lend to).
And anyway, remember again that today’s move by the Fed was focused on the Fed funds rate, its benchmark short-term interest rate. US mortgage rates are more closely tied to longer-term interest rates, which are influenced less by the Fed than by economic growth and inflation.
In fact, longer term interest rates—after an initial bit of volatility—barely budged following the Fed’s announcement today. The central bank stressed that the pace of interest hikes will be gradual and that it will keep a close eye on how the economy is adjusting. That means, for all intents and purposes, the Fed impact on mortgage rates—at least today—was virtually nil.