The Fed just hiked rates again. Here’s how it can impact you, even if you’re not a buyer.

Logo of the Federal Reserve System

Key Takeaways

  • Expect all home finance products to become more expensive.

  • If you are locked in at a very low interest rate with your current home, it's unlikely a move somewhere else will become a priority.

  • With low inventories and high rates, the "affordability" of millions of homes is becoming out of reach.

What the Fed is doing right now

When the Federal Reserve met November 2, it did what most experts expected, and raised interest rates by 75 basis points, or 0.75%. The central bank is trying to tame runaway inflation and an overheated economy, and making it more expensive to borrow money is its key tool.

Making borrowing more expensive is one of the most reliable ways to cool the housing market.But raising borrowing costs is a blunt tool, and it will impact the entire housing market, not just people who are currently trying to buy a home. Here are a few side effects of the Fed’s interest rate hikes, and how they may impact your bottom line.

A chart showing the effective Fed rates.

1. Many home finance products — not just mortgages — will become more expensive. While the Fed doesn’t actually control mortgage rates, it does set the interest rates that banks charge each other. That “Fed Funds Rate,” in turn, is the basis for all types of consumer lending products, like home equity loans and lines of credit.

Right now, for example, a home equity line of credit will cost you in the mid-7% range, according to Bankrate. HELOCs have variable rates, which means they periodically reset according to an underlying rate, like the one mentioned above. If you take out a HELOC now, in other words, it may start at 7% or so, but it’s likely to get more expensive the longer you have it open.

2. People who have secured ultra-low mortgage rates during the past few years are far less likely to want to move. It’s a double-edged sword, because most households with mortgages now have rates that are 3% or lower — the lowest in American history. But to sell a home with a 3% mortgage and buy another when rates are averaging more than double that means massive sticker shock.

This is a phenomenon known to economists as “rate lock” — not to be confused with the kind of rate lock you may choose to do when you’re shopping for a home and a great mortgage deal comes along. In this sense, rate lock is a sign of a stagnant housing market, where people are reluctant to move unless it’s absolutely necessary — and maybe not even then, if the cost is too high.

3. The housing market will likely become even less equal. When mortgages cost 7%, they’re not just pricier than they were a few years ago. They’re simply too expensive for many people to afford. That means the limited supply of homes that are available will go to the people who can afford to pay more for a mortgage, or who have the means to buy with cash.

Homeownership may not be right for everyone, and there’s a lot of value in waiting to buy until you can afford your mortgage payment as well as anything life throws at you — a busted furnace, a flooded basement, job loss, and so on. Still, an American Dream that’s only open to those who can swing it easily, and not those who need to stretch a bit, doesn’t seem fair.

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