Understanding the Federal Reserve and Mortgage Rates

The Federal Reserve, or “The Fed” for short, is the central bank of the United States. One of the Fed’s purposes is to moderate interest rates, which is why it meets every six weeks to set the Fed Funds Rate (the short-term interest rate that banks charge each other.) This number does influence other short-term rates, including home equity loans. So… should you be worried if those rates go up? 

The key to note is that the only mortgages directly affected by a rate hike are adjustable rate mortgages (ARM). These mortgages are tied to short-term indexes, so a change to the Fed Funds Rate can impact the interest rate on ARMs. On the other hand, a fixed-rate mortgage is tied to bonds, so you don’t have to worry about changes to the interest rate. 

Regardless, if the Fed Funds Rate rises consistently, all mortgage rates will eventually follow suit. That means you shouldn’t panic about a rate hike — but you also shouldn’t drag your feet if you can help it. 

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