What do Interest Rate Hikes Mean for Your Mortgage?
If you've picked up a newspaper or caught the news recently, you've probably
encountered a story about mortgage rates and the Federal Reserve banking
system. Like many borrowers, you might wonder how the Fed determines interest
rates and how - in the event of a rate hike - your personal finances could be
affected. Here's a quick overview:
Banks, credit unions, and other lending institutions borrow money from Fed
banks. Since they borrow these funds on a short-term basis, the institutions
are charged at a discount rate that is set by the Federal Reserve Board. This
discount rate has a direct effect on the "Prime Interest Rate," the rate banks
charge their top-rated commercial customers for short-term loans.
The Fed's board of directors meets each month to set financial policy, adjust
interest rates, and provide an economic forecast for the future. Since June
2006, the Fed has raised interest rates several times, a move designed to
stabilize the economy that could translate to tighter cash-flow in your
household. If you are juggling a mortgage, a home equity loan, and any amount
of credit card debt or personal loans, this is probably a good time to assess
the potential damage and, if necessary, refinance your existing mortgage.
Fixed-rate Mortgages
True, a 30-year fixed-rate mortgage may not be the most revolutionary option,
but, in many cases, it is the smartest one. While the introductory rate on an
adjustable-rate mortgage will probably be lower, payments on a fixed-rate
mortgage won't fluctuate, even if the Fed decides to increase the discount
rate. For borrowers who want stability and are not planning to move within 5 -
7 years, the fixed-rate mortgage makes sense.
Adjustable-rate Mortgages
The chief advantage of an adjustable-rate mortgage or ARM is that the initial
interest rate may be lower than that of a fixed-rate mortgage. However, the
fact that your rate is adjustable means that you will likely see higher rates
and bigger monthly payments, somewhere down the road. Some ARMs adjust on a
monthly basis, but most adjust every 6 - 12 months, using a financial formula
based on economic factors like federal interest rates.
Hybrid ARM
Many borrowers opt for the hybrid ARM, a mortgage that typically
carries a low fixed rate for a set period of time (common hybrids are 1/1, 5/1,
and 7/1), and thereafter has an adjustment interval of one year. Those annual
adjustments are tied to federal rates. If you planning to live in your home for
just a few years, the low introductory rates on a hybrid ARM might be a good
bet, but beware the rate fluctuations to come.
Learn more about mortgage rates and home equity loans
at .HomeLoanCenter.com
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