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 interest rate hikes — 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 set by the Federal Reserve Board. This discount rate has a direct effect on the "Prime Interest Rate," the rate that 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. While 2010 has seen historically low interest rates, the Fed will eventually order one or more interest rate hikes possibly leading 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, get a mortgage refinance.
Fixed-Rate Mortgage Help
While a 30-year fixed-rate mortgage may not be the most revolutionary option, it is often the smartest one. While introductory rates on an adjustable-rate mortgages 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 five to seven years, the fixed-rate mortgage makes sense.
Adjustable-Rate Mortgages
The chief advantage of adjustable-rate mortgages (ARMs) is that initial interest rates may be lower than those of a fixed-rate mortgage. However, the fact that your rate is adjustable means that you will likely see higher rates (and monthly payments) somewhere down the road. While some adjustable-rate mortgages change on a monthly basis, most adjust every six to 12 months. This is done using a financial formula based on economic factors, such as 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 3/1, 5/1 and 7/1), and thereafter has an adjustment interval of one year. These annual adjustments are tied to federal rates. If you're 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.
