As we all saw this week, our powerful friends at the Federal Reserve chose not to raise interest rates for the first time in years, citing too much instability in the rest of the world. While the US economy is robust and growing - adding about 200,000 jobs per month - the rest of the developing world has been struggling. (In case you have been avoiding the news, it is kinda crazy out there right now.) But eventually, maybe later this year, the Fed will likely raise interest rates, which will affect home buyers in the US.
As CNN Money states, "Whatever the timing, a rate hike will have implications for millions of Americans. It's important if you have a credit card or savings account, invest in a 401(k) or in the markets, or want to buy a home or car." To that point, I would like to share a brief history of interest rates courtesy of CNN Money:
- The Fed slashed interest rates to zero in December 2008 to help stimulate the economy and housing market during the depths of the Great Recession.
- 10 years ago interest rates on mortgages were near 6%.
- 20 years ago interest rates on mortgages were 7.5%.
- 30 years ago, for those of you under 35, you may not know that mortgage rates got as high as 18%! Big gulp that never happens again!
- The average interest rate on a typical 30-year fixed rate mortgage is 3.9% today.
The first rate hike won't be a game changer overnight, but will pave the way for more hikes over the next couple of years, and rates on all types of things will gradually move up. Experts all agree that the Fed's first move on interest rates will be a small one, probably an increase to 0.25% from 0%. To borrow an analogy from CNN Money, "In the world of interest rates, that's like bunting a baseball."
Remember, the Fed sets a target rate for very short-term debt, but it does not set mortgage rates. The Fed influences interest rates on long term debt such as mortgages, car loans and credit cards. "We don't expect mortgage rates to skyrocket," says Greg McBride, chief financial analyst at Bankrate.com. However, I believe it is important to keep a close eye as you plan the timing on purchasing a home so you don't miss out on historically low rates. As you can see in this graph, Freddie Mac is projecting 6% interest rates by 2020. Read more about what you need to know about a Fed rate hike here.
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