Key interest rates are marching in the same direction, up, and the Federal
Reserve Board did nothing to stop the trend yesterday by raising the federal
funds rate. What's that got to do with the price of eggs? From a consumer's
standpoint, the federal funds rate, which Fed Chairman Alan Greenspan and
company tweaked up by a quarter-point on August 24, means higher borrowing
costs for home-equity loans, credit cards and some personal loans. Combined
with mortgage interest rates recently topping 8 percent, that's bad news for
homebuyers and other consumers, although rates have been even higher in years
The only encouraging words out of the Fed were, in effect, "that's all
folks..." no further increases are expected this year. But together with the
last quarter-percent increase last June, the rate now stands at 5.25 percent.
The Fed's short-term rate does not directly affect mortgage rates--mortgages
are more closely tied to U.S. Treasury notes. But higher Fed interest rates
mean U.S. banks will charge higher prime interest rates, raising the costs of
money in the financial system. Interest charges on home-equity lines of
credit, credit cards, and some personal loans will go up. The only possible
bright side for consumers would be slightly higher returns for certificates
of deposit, money market accounts and interest-bearing checking accounts.
Some analysts say that things aren't all that bad. The Fed actually cut
rates last fall by three-quarter percent when world financial markets were in
danger of collapse. Thus, rates are still lower today.
On the mortgage front, Freddie Mac reported that the average interest rate
for a 30-year fixed-rate mortgage edged down to 7.93 percent for the week
ending August 20, 1999. That's down from last week's average of 8.15
percent; a year ago, the 30-year rate averaged only 6.92 percent. Homebuyers
can counteract higher rates by taking out an Adjustable Rate Mortgage (ARM).
Why is the interest rate so important to the first-time homebuyer? Because
generally speaking, you'll be paying more interest than principal during the
early years of owning your home.
Your monthly ARM payments will be lower to start off with because these loans
generally begin with an interest rate that is 2-3 percent below a comparable
fixed rate mortgage. You could use the lower rate to buy a more expensive
home, or use the savings for other needs. What's the catch? The interest
rate changes at specified intervals (for example, every year) depending on
changing market conditions and the particular "index" your rate is tied to.
If interest rates go up so does your monthly mortgage payment. However, if
rates go down, your mortgage payment will go down, too.