What Do Interest Rate Hikes Mean For Your Mortgage

What Do Interest Rate Hikes Mean For Your Mortgage?
If you've picked up a​ newspaper or​ caught the​ news recently,​ you've probably encountered a​ story about mortgage rates and the​ Federal Reserve banking system .​
Like many borrowers,​ you​ might wonder how the​ Fed determines interest rates and how - in​ the​ event of​ a​ rate hike - your personal finances could be affected .​
Here's a​ quick overview:
Banks,​ credit unions,​ and other lending institutions borrow money from Fed banks .​
Since they borrow these funds on​ a​ short-term basis,​ the​ institutions are charged at​ a​ discount rate that is​ set by the​ Federal Reserve Board .​
This discount rate has a​ direct effect on​ the​ Prime Interest Rate,​ the​ rate banks charge their top-rated commercial customers for short-term loans.
The Fed's board of​ directors meets each month to​ set financial policy,​ adjust interest rates,​ and provide an​ economic forecast for the​ future .​
Since June 2018,​ the​ Fed has raised interest rates several times,​ a​ move designed to​ stabilize the​ economy that could translate to​ tighter cash-flow in​ your household .​
If you​ are juggling a​ mortgage,​ a​ home equity loan,​ and any amount of​ credit card debt or​ personal loans,​ this is​ probably a​ good time to​ assess the​ potential damage and,​ if​ necessary,​ refinance your existing mortgage.
Fixed-rate Mortgages
True,​ a​ 30-year fixed-rate mortgage may not be the​ most revolutionary option,​ but,​ in​ many cases,​ it​ is​ the​ smartest one .​
While the​ introductory rate on​ an​ adjustable-rate mortgage will probably be lower,​ payments on​ a​ fixed-rate mortgage won't fluctuate,​ even if​ the​ Fed decides to​ increase the​ discount rate .​
For borrowers who want stability and are not planning to​ move within 5 - 7 years,​ the​ fixed-rate mortgage makes sense.
Adjustable-rate Mortgages
The chief advantage of​ an​ adjustable-rate mortgage or​ ARM is​ that the​ initial interest rate may be lower than that of​ a​ fixed-rate mortgage .​
However,​ the​ fact that your rate is​ adjustable means that you​ will likely see higher rates and bigger monthly payments,​ somewhere down the​ road .​
Some ARMs adjust on​ a​ monthly basis,​ but most adjust every 6 - 12 months,​ using a​ financial formula based on​ economic factors like federal interest rates.
Hybrid ARM
Many borrowers opt for the​ hybrid ARM,​ a​ mortgage that typically carries a​ low fixed rate for a​ set period of​ time (common hybrids are 1/1,​ 5/1,​ and 7/1),​ and thereafter has an​ adjustment interval of​ one year .​
Those annual adjustments are tied to​ federal rates .​
If you​ planning to​ live in​ your home for just a​ few years,​ the​ low introductory rates on​ a​ hybrid ARM might be a​ good bet,​ but beware the​ rate fluctuations to​ come.
What Do Interest Rate Hikes Mean For Your Mortgage What Do Interest Rate Hikes Mean For Your Mortgage Reviewed by Henda Yesti on July 04, 2018 Rating: 5

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