What Higher Fed Rates Mean for Homebuying — and Why It’s Probably Not What You Think

July 26, 2022

For aspiring home buyers, hearing news reports about federal interest rate hikes can be a bit disheartening. But conflating the “inter-bank” Federal Funds Rate (FFR) with interest rates across the board is a common mistake. In fact, there are a number of reasons why buying a home right now can work in your favor – the trick is being smart about the property you buy and also the type of home loan you use to buy it.

eLEND is here to help. Learn more about why buying a home can be a smart move right now and how it can help you hedge against the rising rates of inflation.

How the Federal Funds Rate Impacts Mortgages

In short, it doesn’t really.

To better understand how “The Fed” interest rate relates to your homeownership goals, let’s establish a general understanding of how it works. The Fed Funds Rate that is reported in the news is the interest rate that covers how banks borrow and lend to each other. It does not directly impact fixed rate loans like mortgages as it does variable loans like credit cards (or home equity lines of credit). Rather, as the New York Times succinctly states, “Rates on 30-year fixed mortgages don’t move in tandem with the Fed’s benchmark rate, but instead track the yield on 10-year Treasury bonds.”*

In other words, there isn’t a direct correlation between how most mortgages operate and what’s going on with the FFR, especially when it comes to fixed-rate loans. In fact, many current homeowners with variable-rate loans are refinancing into fixed-rate mortgages right now because they work better with the current federal interest rates than those projected in the near future.

The Federal Interest Rate vs. Real Estate Interest Rates

Even though the FFR has risen recently, interest rates on loans for real estate are still relatively low compared to historical averages. The actual impact that the federal interest rate increase has had on real estate is more on the purchase price side than on interest rates throughout the industry. For aspiring homeowners that may be a concern itself, with down payments worth 20% the purchase price on most closings — but that’s also not always the case.

eLEND has a variety of options for homebuyers with simple qualifying terms and down payment requirements as low as 0%, for qualifying borrowers and property locations. These options could help you lock in your monthly mortgage payment now so that you won’t be affected by the projected future interest rate increases.

The Benefit of a Fixed Rate Mortgage in Today’s Market

There are a variety of fixed-rate mortgages that can help you to buy a home in the current market — we know this because we provide a lot of them to hopeful homebuyers just like you. Getting a fixed-interest rate loan now locks in your monthly payments, helping you to avoid the impact of future interest rate hikes or rent increases in an uncertain market.

And that brings up something else to factor into your homebuying decision — rent hikes. Just as the prices of homes are going up, the cost of rent is rising as inflation affects the market. The beauty of a fixed-rate mortgage is that you know exactly what your monthly payment is going to be no matter how the market changes. Not to mention that monthly living expenses tend to become much more palatable when you actually own the property. Because with every payment, you’re effectively building equity in your home.

So instead of being anxious, you can start getting excited because buying a home right now is a smart decision when considering how your monthly housing payments could rise otherwise.

If you’re able to save up even 3% of a home’s price for a down payment, call us for details to see if you qualify – eLEND has plenty of options!  Now is an excellent time to lock in a low mortgage rate and start building equity by fulfilling your dreams of homeownership.

Homeownership is a Great Hedge Against Inflation

With the spike in inflation in recent months, a home is truthfully one of the best assets you can have. After all, real estate tends to stay in line with other assets that rise in cost during inflationary periods. That makes a home an excellent hedge against inflation, combating the erosion of purchasing power and retaining its value regardless of extenuating factors. The fact is property values have continuously increased over time. And owning a home is a reliable way to create wealth and increase your net worth.

What’s more, remember that there is always the option to refinance a home in the future — should interest rates go down to the point where it makes financial sense.

With the fed hiking rates and inflation also on the rise, you probably didn’t think buying a home was possible right now. But now you know the truth. Locking in a fixed rate and building equity will help you to maintain the value of your money despite inflation, and eLEND is here to help you get started. Contact us today to discuss your options.