This is an updated version of our article How Does the Fed Rate Increase Affect Mortgages? Originally published in May 2022.

In August, the Bureau of Labor Statistics reported that the Consumer Price Index measured year-over-year inflation at 8.3%. The Consumer Price Index is a calculation that tracks how much the average cost of consumer items changes over time and is a widely used method of measuring inflation.

Like most consumers, you’re probably concerned about the continued reports of increasing inflation, and likely feeling the brunt of these growing numbers. We are all experiencing the increase in prices at the supermarket when buying groceries, in your monthly energy bills, as well as when shopping for household and luxury goods alike.

The Federal Reserve, which is charged with navigating US financial policy, is working to address those concerns and stomp out this continued inflation. Raising the federal funds rate is a tried-and-true economic lever they can pull to help counteract inflation.

One concern is how inflation and rising rates will affect bigger-ticket purchases, like cars or homes. If you’re in the market to buy or sell a home, you’re probably also concerned with how this is affecting mortgage rates and the housing market. In this post, we explain the most recent Fed rate increase that happened this month and how it’s affecting the real estate market.

Why is the Fed Raising Rates Again?

If you’ve been keeping up with financial news, you’ll know that this is the fifth time the Fed has raised the federal funds rate this year. Out of those five, this is the third 0.75% increase. With several rate increases already this year, you might be wondering why there was another one in September.

While the previous rate increases did affect some parts of the economy, they haven’t stopped the monthly increases in inflation metrics yet. As the Federal Open Market Committee (FOMC) continues to meet throughout the rest of the year to review the rate of inflation and other indicators of the health of our economy, they will continue to make the adjustments needed to provide stability and prevent worsening economic conditions.

As part of the review process that took place on September 21, the Fed hiked rates by 0.75%. This new rate dictates how much banks must pay to borrow funds, which can, in turn, impact the interest rates those same banks offer to consumers for many types of loans.

How the Rate Hike is Affecting Mortgage Interest Rates

September’s 0.75% federal funds rate increase does not mean that mortgage interest rates just also increased by the same amount.

The Fed’s rate hike is intended to control inflation, which is what has caused interest rates on consumer loans, like cars and mortgages, to go up. When inflation increases, it decreases the long-term value of a 30-year mortgage, which means the rates for those loans have to move higher in order to value them more appropriately.

This still doesn’t mean mortgage rates will rise at the same pace as the Fed’s increase. Why? First, there are many market forces that influence mortgage rates. If investors shy away from stocks in favor of mortgage bonds, for example, we may actually see rates come down. Also, mortgage rates had already risen in anticipation of a Fed move. They may begin to even out now that the Fed has spoken.

How the Fed Rate Increase is Affecting Home Sales

Some buyers might be worried about the rise in mortgage interest rates. But you should keep in mind that interest rates are only one part of the equation for home affordability.

Home prices will also fluctuate as changes in demand play out. While you may be quoted a higher interest rate for your loan compared to this time last year, that could potentially be offset by a lower purchase price. The most important thing you can do is stay connected with your real estate agent and loan officer, so that you can adjust your budget and home search as needed.

What to Expect for the Rest of 2022 & 2023

Since inflation has continued to rise, it will take time to reverse that and stabilize parts of the economy. That’s why the Fed is spacing out these rate increases over time.

This ensures that the data can be collected and analyzed, and that careful consideration can be given before any rate changes are enacted.

While many economists are confident that inflation can drop to a more manageable level, most also agree that additional Fed rate increases will be needed to get there.

The silver lining is that each time the Fed raises the rate, they’re helping to bring down the high costs of inflation we’ve all been experiencing, which is ultimately a good thing for everyone.

Should You Wait Until Rates Drop to Buy a Home?

If you’re thinking of buying a home, we encourage you to consider all the moving pieces – not only in the markets but in your life.

Remember – you are buying the home, not the mortgage. The opportunity to lower your mortgage rate via a refinance is likely to happen at some point in the future as the Fed’s interest rate actions finally curb inflation.

If now is the time for you to buy a home or tap into your equity, there are solutions that can work for you in today’s rate environment. Rates are still lower than historic averages, and options like 2/1 buydowns, hybrid ARMs, and HELOCs can all help right now.

Whether you’re buying or selling a home, or just considering your options for an upcoming real estate transaction, our team of mortgage experts are always happy to discuss market changes. They can help you navigate the Fed rate increase and explain how it might affect your loan options.

Reach out to an FHM loan officer today for a free consultation.

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