Fed Rate Increase

Double Wammy- Fed Funds Rate and Prime Rate to Increase

After 12 rate increases by the Fed, it does appear that the real reason behind the Fed action is to apply the brakes on inflation. The Fed seems confident that economic growth is on track but wary that costlier energy could "fuel" dangerous inflation.  From all reports it is working. All types of borrowing will cost more. On the "Sunny-Side" savers will shortly see a bump in the meager interest they are receiving as deposit interest runs opposite to loan rates. The Fed seems confident that economic growth  is on track but wary that costlier energy could "fuel" dangerous inflation.  From all reports it is working. All types of borrowing will cost more. On the "Sunny-Side" savers will shortly see a bump in the meager interest they are receiving as deposit interest runs opposite to loan rates.

The Federal reserve today raised the Fed Funds Rate 1/4%  to 4.0%  The federal funds rate is the rate banks charge each other for overnight loans to comply with the Fed's reserve requirements. By buying or selling Treasurys in the market, the Fed can set the interest rate and influence the price of credit. Th ePrime Rate, that many members understand will shortly be raised the same amount.

What Does It Mean To You?

Adjustable Rate Mortgages

ARMs have the most one for one relationship with the Fed Funds rate -- they are usually indexed against the one-year Treasuries which are tied closely to the Fed Funds Rate. Every borrower will feel the pain when these rates go up.

Some borrowers who recently got an ARM may know that their rate can only go up a maximum 2 points.

If interest rates go up two percentage points on a $216,000 mortgage (About the average in the U.S.) Borrowers could be on the tab for $269 more a month.

Fixed Rate Mortgages

The Fed plans deliberate future increases also meaning fixed mortgage rates may continue their rise.

If Mortgage rates go up 1 Point, the above $216,000 loan would cost $140 more per month (5.4% vs 6.4%).

Lines of Credit Tied To Home Equity

These loans are mostly always tied to the Prime rate so expect a rise in the very near future.

Home Equity Loans

These loans are ties to the equity in the home and are pegged to one-year treasury yields or the prime, which move in lockstep with the Fed rate.

If you are in the process of borrowing now—LOCK IN THE RATE TODAY as the full effect may not hit for a few more weeks. After that look to pay about $100 more per month on $100K loan.

From Ginger Downs' My Home Management Club, a member of the Chicago Association of Realtors.

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