The greatly anticipated rate hike is coming....likely tomorrow, December 16, 2015. Putting aside the buzz and confusion, here's an explanation to some of the terms being thrown around as well as what's due to happen in layman's terms:
What does "Fed funds" rate even mean?
According to Lou Barnes with Inman.com:
- Banks trade cash amongst each other overnight, every night, and the “Fed funds” rate is the fundamental cost of money. The Fed might raise that rate two or three or eight times without raising mortgage rates.
I hear the term "Prime rate" a lot, what is that?
- The “prime” rate moves mechanically three percentage points above the Fed, no matter what. The Fed’s last move in any direction was December 16, 2008, when it dropped the Fed funds rate to a band of 0.0 percent to 0.25 percent, and prime ever since has been 3.25 percent.
- Prime will rise to 3.50 percent on Wednesday afternoon, December 16, 2015 and every home equity line of credit in its adjustment phase (about a half-trillion dollars’ worth) will move up, too.
- "Prime" rates and adjustable-rate mortgages due for adjustment will rise with the Fed.
How serious is this?
Jim Puzzanghera with the LA Times says:
- "It's much like that first dusting of snow," according to Greg McBride, chief financial analyst for financial information website Bankrate.com, said of the much-anticipated Fed rate hike. "That's not what cancels school and messes up traffic. But it's the signal that winter's coming." This analogy hits home for you Montanans out there :)
Is this anticipated 0.25 rate hike a big deal? I don't understand how this affects me as a buyer or seller?
- The increase in the so-called federal funds rate this week is considered minuscule. The next similarly small move probably would not come until March or even June. The takeaway here is that rates are going to slowly adjust upward.
Explain this in dollar terms to me. How much more out of pocket will I be paying for a mortgage?
- If you are already under contract to buy or sell a property, you probably have a rate locked in with your lender that won't be affected by this. Check with your lender to be sure. For the rest of us, the rate change could affect a buyer's debt-to-income ratio(1), meaning how much of their income is allowable towards a mortgage. This in turn can affect someone selling a home because it shifts the amount of people that can qualify to purchase your home if you are selling.
Show me the money!
- Well, I'd be glad to. Click here for a quick 3-second "What Happens If You Wait To Buy/Sell" calculator for an automatic analysis of what a small rate change would mean for a purchase or sale you are considering right now. This quick 2-line excel calculator will allow you to plug in a home price and interest rate to compare purchasing now or in one year's time. Play around with it, changing the purchase price and interest rate to see how small shifts can affect your outcome.
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(1) A debt-to-income ratio is one way lenders measure your ability to manage the payments you make every month to repay the money you have borrowed.
To calculate your debt-to-income ratio, you add up all your monthly debt payments and divide them by your gross monthly income. Your gross monthly income is generally the amount of money you have earned before your taxes and other deductions are taken out. (Source: consumerfinance.gov)