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How might Fed rate increases affect my home loans?

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The answer depends on what type of home-based financing you have or are considering.

On March 15, the Federal Reserve raised rates for the first time in 2017, and it may not be the last. Here’s how future rising interest rates may affect home-based loans you may already have or are thinking of getting.

If you already have a mortgage…

If or how a Fed rate increase would affect your interest rates (and potentially your monthly payment amounts) depends on whether you have a fixed-rate or variable-rate mortgage. With fixed-rate mortgages, the interest rate you agreed to when signing the mortgage generally remains the same throughout the life of the loan. So, usually, a fixed rate wouldn’t change as a result of Fed action.

If you have a variable-rate mortgage, your interest rate is likely to increase as a result of Fed rate hikes. That’s because when the Fed raises rates banks need to pay to borrow from the Federal Reserve System, those borrowing banks typically raise their rates accordingly, creating a ripple effect throughout the credit economy.

If you’re considering a mortgage…

If you haven’t gotten a mortgage yet, the rates you’re considering will probably be higher now than they were before the Fed hike. Keep in mind, though, that rates are still near historical lows, the Fed increase is a relatively small step higher, and the Fed could continue increasing rates in the relatively near future.

If you’re considering a Home Equity Line of Credit (HELOC)…

What about HELOCs? Since HELOCs are lines of credit (similar to credit cards), they generally carry variable interest rates. That means, if you already have a HELOC, you may see your rate increase as a result of the Fed rate increase. If you’re considering a HELOC, know that your rate may be higher after a hike than it would’ve been beforehand.

While it’s a good idea to understand how the Federal Reserve functions and to stay on top of financial news, the key is to focus on the details of your specific financial situation. You shouldn’t necessarily let a Fed rate change be the sole reason for getting a mortgage or taking out a loan.

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