By Bob Schwartz, CRS, GRI ©2006 www.brokerforyou.com All rights reserved. After the latest 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 Federal reserve raised the Fed Funds Rate 1/4%. 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. The Prime 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 San Diego real estate 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—It may pay to LOCK IN THE RATE as the full effect may not hit for a few more weeks. Than, look to pay about $100 more per month on $100K loan. Be sure to visit our top rated San Diego real estate website
ABOUT THE AUTHOR Bob Schwartz, is a Certified Residential Specialist, CA licensed real estate broker with Downtown San Diego real estate. Bob has over 27 years of residential real estate experience, authored a number of published articles and served as an expert witness for San Diego legal firms. Other sites of interest are: San Diego real estate, Los Angeles lawyers, San Jose lawyers, Hoodia diet aids, California gold nuggets & Epson inkjet cartridges.
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