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What the Fed Interest Rate Hikes Mean for Home Buyers, Owners and Sellers

On March 16, the Federal Reserve raised its interest rates for the first time in three years. That’s a big deal for people who own (or want to own) a house!

But if you’re like most people, you may have some questions about what’s happening—like, “How does the Federal Reserve rate increase work?” or “How does that affect my mortgage?” or “Does this mean I can’t buy or sell a house?”

Great questions! Let’s get you some answers. We’ll walk through what “the Fed” did and how those rate hikes could affect home buyers, home sellers and homeowners.

What’s the Federal Reserve?

The Federal Reserve (or Fed) is a central bank—a government agency that makes and distributes money. It also creates policies about money.

The Fed includes a Federal Open Market Committee that makes the policies, a board of seven governors who help run the daily operations, and 12 regional banks. These banks are supposed to represent the states’ best interests and bridge the gap between the Federal Reserve and private lenders.

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The government created the Federal Reserve in 1913 after a bunch of economic panics and depressions in the 1800s. The Fed is supposed to help regulate the economy to keep it stable.

Spoiler alert: It didn’t work. The government’s really bad with money. . . and now they’ve given themselves the power to tinker with the economy. Here’s how.

What Does the Federal Reserve Do?

When the American economy goes up or down, the Fed starts sticking its nose into things and trying to figure out how to keep our national money system stable. They try to do that by:

  • Raising or lowering interest rates (more on that in a minute)
  • Monitoring risk in our financial system
  • Regulating member banks and trading centers, like Wall Street
  • Managing the national money supply by printing new money or taking old money out of circulation

The Fed does a lot, but right now, we’re just going to focus on how they raise and lower interest rates.

Why Is the Fed Raising Interest Rates?

The short answer is, they’re trying to slow down inflation.

The Fed and some other economic experts believe when people borrow less money, our economy flows slower—which they think helps slow down inflation. So they want to discourage borrowers from taking out mortgages and other loans.

On March 16, 2022, the Fed raised the federal funds rate. That’s the interest rate banks charge each other to borrow money overnight. (Banks sometimes do that to keep from getting in trouble for having too little cash on hand at the end of a given business day.) The Fed also plans to increase this rate several more times this year.

With these increases, banks have to pay each other more interest. Then, they charge you more interest to make up for it. So even though the Federal Reserve doesn’t actually set mortgage interest rates, its decisions can still affect your mortgage—and it can impact other areas of your finances.

That’s why mortgage rates rose in 2022—even before the Fed did anything. When the Federal Reserve starts messing with the interest rate banks pay, it isn’t long before people start to suffer. Banks saw what was coming, and they started upping interest rates to protect their own bottom lines.

 Here’s how the Fed rate hikes could affect you and what you can do about it.

How Do Federal Interest Rate Hikes Affect Home Buyers and Home Sellers?

Interest rates don’t just impact this year’s real estate market. They impact real people like you. Here’s what rising interest rates mean for home buyers and home sellers.

Home Buyers

High interest rates cost home buyers more in the long run. Let’s see how this plays out for two couples.

Both couples bought $350,000 houses with 20% down and 15-year fixed-rate mortgages. Jim and Donna bought their house in February 2021, when the average interest rate was 2.24%.1 Bob and Cheryl bought their house a year later—after the average rate rose to 3%.2

We used our mortgage calculator to see what both couples will pay for their houses. To keep things simple, we left out costs for property taxes, homeowners insurance and HOA fees.

15-Year Fixed-Rate Mortgage

Jim and Donna’s House

Bob and Cheryl’s House

Home Value

$350,000

$350,000

Down Payment

$70,000

$70,000

Loan Amount

$280,000

$280,000

Interest Rate

2.24%

3%

Monthly Payment

$1,833

$1,934

Total Interest Paid

$49,928

$68,053

Total Cost

$399,928

$418,053

Bob and Cheryl will pay $18,125 more in interest than Jim and Donna—even though their homes and loan terms are the same. Plus, Bob and Cheryl’s house payment is $100 more per month. Ouch!

Should You Buy a House Right Now?

High interest rates can be hard to swallow. But does that mean you shouldn’t buy a house? It depends on your situation.

If you like where you live—or you can tolerate it for another year or two—you may decide to buy after interest rates go down. Remember, the housing market changes constantly. While rates have gone up (and will probably keep rising for a while), these spikes won’t last forever.

But for those who are truly ready to buy a home, you may not want to wait. That’s okay. The housing market should inform your decisions—not make them for you. If you plan carefully, you can still buy a home.

Just make sure you can put at least 10% down (20% is better because then you can avoid private mortgage insurance) and that your monthly mortgage payment is one-fourth or less of your take-home pay. Or—better yet—pay 100% cash for your home. Then you never have to worry about interest rates!

Home Sellers

Have you ever seen a nature documentary where a bunch of wildebeests need to cross a river, but they don’t want to jump in? That’s because wildebeests are smart. They know there are crocodiles in the river, and they don’t want to get eaten.

That’s sort of how home buyers feel right now. Even though they want to buy a house, many are reluctant to face those high interest rates. That can make your house harder to sell.

Should You Wait to Sell Your House?

You can wait if you want to. But if you’re ready to sell your house, go for it! Some buyers may back out of the market, but others are ready to dive in. Focus on doing things to attract them and help your house sell faster.

For example, you can stage your home better, get honest about the real reasons buyers aren’t interested, and avoid home-selling mistakes like asking too much or hiring the wrong real estate agent. Finally, be patient and trust your real estate agent to bring you the right buyers at the right time.

Finding a Good Real Estate Agent

Whether you’re buying or selling a home, you need an expert real estate agent who knows the market in your area. That’s why we created the Endorsed Local Providers (ELP) program.

The ELP program helps connect you with top-performing, local real estate agents. These pros are on a mission to serve you—even if it means less money in their pockets. We call them RamseyTrusted, because we trust them to put you first. Period.

Find a RamseyTrusted real estate agent today.

How Do Federal Interest Rate Hikes Affect Mortgage Borrowers and Current Homeowners?

Okay, we’ve talked about home buyers and sellers. But what if you already have a mortgage? Do changing interest rates affect you too?

They can! We’ll explore how the Fed’s decisions could affect current homeowners who have these types of mortgages: fixed-rate conventional loans, ARMs, HELOCs and refinances.

Fixed-Rate Conventional Loans

Good news for you: Your interest rate won’t change, and neither will your monthly mortgage payment! (You can breathe now.)  

While the Federal Reserve’s rate hikes won’t affect your home loan, you will feel the pain if you take out other loans (like a car loan). That’s because lenders are raising interest rates on most loans—not just mortgages.

It’s also another reason why we tell people to stop taking on new debt—and get rid of debt they already have! No debt equals no interest.

ARMs

With an ARM, or adjustable rate mortgage, your lender can change your interest rate—and in turn, your monthly payment.

ARM mortgage borrowers should know federal interest rate spikes will affect them more directly than people with fixed-rate loans. If the Federal Reserve raises the federal funds rate by 0.25%, your rate will probably go up 0.25% too. (Good luck getting it back down.)

Many ARM lenders adjust interest rates every six to 12 months. The (sort of) good news is you may have a few months before your lender changes anything. But that’s not really great. Your lender could wait for the Fed to raise rates two or three more times in 2022, then hit you with a huge increase.

Don’t wait for your lender to raise your rate. Refinance to a fixed-rate 15-year mortgage to give you and your family some financial breathing room. (More on that in a minute.)  

HELOCs

A HELOC (or home equity line of credit) works like a credit card, where you borrow money and pay back a little at a time. The difference is, you’re borrowing against your house . . . so if you can’t pay what you owe, the lender can take your home.

That’s scary. But it gets worse. Most HELOCs have variable interest rates—and they can change more often than ARM rates. So any time the Fed sneezes, your rate will go up. In fact, your HELOC’s interest rate will increase the same amount as the Fed rate. 

Talk about stressful! If you’ve got a HELOC, you need to ditch it ASAP. Pay it off if you can—if not, refinance to a 15-year fixed-rate mortgage.

Refinances

Okay, so you’ve probably noticed a theme: We only recommend 15-year fixed-rate mortgages. Why? Because they’re the cheapest mortgages you can get, and you can pay them off faster.

Why Is Paying Your House Off Early Good?

Let’s pause and clear this up right quick: Lenders say paying off your home early is bad because they want to keep charging you interest. But in reality, paying off your house early is good.

Think about it: How much money do you spend on your mortgage each month? Now imagine getting to keep it. You could take your dream vacation or pay for your kids’ college. You could buy Christmas presents for hundreds of kids in need. Without a mortgage, you have money to meet your needs and be outrageously generous. (Plus, the grass just feels different when you own it.)

That’s why we recommend 15-year fixed-rate mortgages—so you can live like no one else. If you don’t have a 15-year fixed-rate mortgage, you might want to consider refinancing.

Should You Refinance?  

There are times when you should refinance and when you shouldn’t. For example, let’s say you recently got a 15-year fixed-rate mortgage. It’ll probably be hard to get a lower interest rate during the Fed rate hikes. Since you’ve got a good thing going, just keep rockin’ it.

You’ll also want to avoid cash-out refinances now and forever. With those, you’re just taking on more debt—and it’s never a good time for that.

But a regular refinance could be helpful if you can get a shorter loan term or switch from an adjustable-rate loan to a fixed-rate loan. Then you won’t have to worry about how the Fed interest rate spikes will affect your mortgage payment.

Taking Control of Your Mortgage

The most important thing you can do to deal with the federal interest rate hike is to take control of your mortgage—and your money. The government won’t save you. If anything, they’ll make your mortgage situation worse.

See, the Federal Reserve tries to stabilize the economy with debt, but debt makes people’s lives more unstable. (Just look at our 2022 State of Personal Finance Report to see for yourself.) The truth is, debt sucks—and you don’t need it. You also don’t need the government’s bad money decisions ruining your dreams of homeownership.

You can pay off your mortgage and get financial peace when you follow a proven money plan that actually works. It’s called the 7 Baby Steps. You can take back your life. You can be the hero in your story!

And you can put the right team of people around you to help make that happen. Not the government—they can’t find their butts with both hands. We’re talking about people who can actually help.

Work With a Mortgage Lender You Can Trust

While it’s smart to get the lowest possible interest rate on your mortgage, that doesn’t mean you have to wait years to buy or sell a house—or to refinance if your current loan just isn’t working for you. You get to make decisions based on what’s right for you and your family, not what the Fed’s doing.

Work with a smart mortgage lender who actually wants you to get the best mortgage for you. Our friends at Churchill Mortgage will help you find a home loan that works with your budget and puts you on a path to pay off your house fast.

Talk to a RamseyTrusted mortgage expert at Churchill.

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Learn More.

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