Are Interest Rates Increasing in 2016?

There has been a lot of discussion about the potential to raise interest rates. But throughout all of this conversation, it can be difficult to understand the impact that this can have on your existing mortgage loan.

What Does It Mean to Raise Interest Rates?

The Federal Reserve (the Fed) manages the federal funds rate, which is the interest rate exclusively for larger financial institutions, like banks. Until the last few months, the Fed hadn’t risen interest rates in nearly nine years, which was the outset of the most recent U.S. recession

Now that many economists agree that we are out of the recession, they are discussing implications and strategy to bring the interest rate back up gradually. If the rates for the banks rise, then economists typically project other rates to increase as a result.

The idea behind raising interest rate is that after an economic recovery, more people are employed with income stability and disposable income. Therefore, if the economy is healthy, then higher interest rates could help pump that extra money back into the economy.

How Am I Affected by Interest Rate Hikes?

It is likely that the Fed will raise interest rates gradually, likely in 2 to 4 small increments in 2016. As interest rates rise, the economy will see a slight borrowing deflation because not as many people will be able to borrow, which will drive mortgage rates up. Each mortgage type can be affected in different ways.

  • Adjustable Rate Mortgage (ARM) – With an adjustable rate mortgage, you could see your monthly payments go up during the next few years. Your payments will reflect the current state of the raising interest rates, which is projected to go up.
  • Fixed Rate Mortgages – With a fixed rate mortgage, your mortgage will not be affected by the rising interest rate. Your mortgage will remain stable, through interest rate increases and decreases.

Now is a great opportunity to buy or refinance!

If you’re thinking about buying or refinancing your home, now is the time. Before these rates go up over time, look into your mortgage loan options, as that will benefit you in the long term as you will begin your mortgage with record low interest rates.