How Do Interest Rates Affect Home Loans?

If you’re in the market for a new home and are currently considering the various mortgage loans that you can obtain, likely the biggest factor in what your monthly payment will be is the interest rate that is applied to the loan. While the bank that issues the loan will set its own interest rate, the Federal Reserve provides the baseline for any rate changes. In 2017 and 2018 alone, the Federal Reserve increased standard interest rates seven times. Before you purchase a new home, it’s important that you’re fully aware of how interest rates will affect your home loan.

How Interest Rates Work

To understand what a higher or lower interest rate will do to your loan, you first need to know more about how mortgage rates are determined. The Federal Reserve determines the rate of federal funds, which affects the variable and short-term interest rates of different loans. Banks need to lend money to other banks overnight on a regular basis in order to make sure that they have enough cash reserves on hand. When the rate of federal funds increases, banks need to pay more money in order to borrow from other banks. These increasing costs are passed to the consumers via higher interest rates on all kinds of different loans.

Rising Rates Increase Price of Loan

When interest rates increase, you may need to pay more in order to get a mortgage loan. Let’s say that your loan of $200,000 comes with a fixed interest rate of 5% for 30 years. An interest rate increase of even 1% can raise your monthly costs by well over $100.

Offset Rising Interest Rates by Obtaining Different Home Loans

In order to pay less for your loan, you might want to think about obtaining an unconventional loan for your home. For instance, an FHA loan only requires an initial down payment of 3.5 percent, which could offset the higher interest rates that you might need to pay. You could also consider a VA loan, which comes with no down payment. If you want to obtain the lowest interest rates, it’s recommended that you hire the best loan officer in Las Vegas to assist you in your search for the right loan.