Fed Rate Hikes Are Coming: What This Means and How to Prepare

Blog posted On February 01, 2022

For the past two years, home buyers and owners have been reaping the rewards of record-low mortgage rates. In March 2020, the Federal Reserve made an emergency interest rate cut, lowering the benchmark rate to near zero. As a result, mortgage rates dropped to historically low levels. By locking in mortgage rates while they are low, buyers and owners are drastically reducing their monthly payments saving thousands over the life of their loan. But last week, the Fed hinted that this is all about to change.

When will rates rise?

Following last week’s Federal Open Market Committee’s (FOMC) meeting, the Fed announced that there would be no interest rate hike in January. Good news in the short term, but the story doesn’t end there. “With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate,” read the FOMC statement. Fed Chairman Jerome Powell added further clarity to the definition of ‘soon’ in his press conference Wednesday afternoon. “I would say that the Committee is of a mind to raise the federal funds rate at the March meeting, assuming that conditions are appropriate for doing so,” said Powell.

What does a rate hike mean and how will it affect you?

While the benchmark interest rate does not directly set mortgage rates, it does influence their trends. “When the Fed is in an environment where [it's] raising rates, we tend to see all interest rates move higher including mortgage rates,” explains Danielle Hale, chief economist at Realtor.com. One of the many reasons why mortgage rates have been so low over the past two years is because the benchmark rate has been near zero. That being said, there are several influencing factors that affect the mortgage rate trends. For example, when the benchmark interest rate was near zero from 2008 to 2015, mortgage rates were still reaching levels between 4% and 5%. When the Fed finally started hiking up the benchmark interest rate from 2016 to 2019, mortgage rates were generally hovering in the 3% to 4% range. So is it possible that the Fed hikes the benchmark rate without it drastically affecting mortgage rates? Many experts are predicting a rise in mortgage rates following the benchmark rate hikes. But Fed Chair Powell thinks there is ‘wiggle room’ with the rate hikes. “I think there’s quite a bit of room to raise interest rates without threatening the labor market,” he said.

How you can prepare for rising rates

If you’re on the fence about buying or refinancing, now is the time to jump in. “In this environment, it doesn’t make sense to wait,” says Hale. Mortgage rates are just now starting to break into pre-pandemic levels. When the benchmark rate starts to rise, they will likely continue to climb.  . “The clock is most certainly ticking," says Andy Walden, vice president of enterprise research and strategy at Black Knight. If you already have a mortgage here are a few things you should check:

• Could you lower your interest rate?
• Do you have a fixed-rate mortgage?
• Could you shorten your loan term?
• Have you considered taking cash out?

Asking yourself these questions is an important step in preparation for the upcoming months. You can also check out our refinance guide for more information or try our mortgage calculator to see how you could best optimize the current rates.

Sources: CNBC, Federal Reserve, Money, Mortgage News Daily