2022 Fed Rate Hike Impact On Mortgages, Home Buying And More

If you’ve purchased groceries, gas, and other goods or services in the last few months, you may have noticed a higher bill. Households across the country are feeling the effects of inflation, brought on by supply chain disruptions paired with higher consumer demands.

As Americans work on adjusting their budgets, the Federal Reserve, which serves as the U.S. central bank, is working to get inflation under control. To do this, the Federal Reserve (also known as the Fed) raises rates. This is meant to encourage saving and reduce consumer spending, which, in turn, decreases demand.

While raising rates can help the Fed address inflation, it can impact financing options, including mortgages.

This guide will help show the impact of the fed rate hike on home buyers, home sellers and homeowners. Read top to bottom for an all-encompassing view or jump to the specific sections of the guide that are most relevant to your situation.

In March 2022, the Fed raised its federal funds benchmark rate by 25 basis points, to the range of 0.25% to 0.50%. The rate hike marked the first time since 2018 that the Fed has increased rates.

In early May 2022, the Federal Reserve issued another statement that it would again raise the target range for the federal funds rate to between 0.75% and 1%. In an effort to lessen the size of the Federal Reserve’s balance sheet, the Fed also announced that it would be reducing its holdings of Treasury and mortgage-backed securities.

In June 2022, the Fed raised the rate by an additional 75 basis points, or 0.75%, in an effort to curb the continued elevation of inflation. This increase brought the target rate range between 1.5% and 1.75%, and it marked the largest single rate hike since 1994. 

In July, after Consumer Price Index numbers showed inflation was 9.1% on an annual basis, the Fed raised interest rates an additional 0.75% to a target range of 2.25% – 2.5%. The hope is that this takes a bite out of inflation, but it also will likely push interest rates higher for borrowers.

In September, with inflation still running stubbornly hot, the Federal Reserve increased the target for the federal funds rate still another 0.75% to a range of 3% – 3.25%. The Federal Reserve also released median projections showing that they anticipate the target rate to be 4.4% by the end of 2022.

The projections mean the central bank believes additional rate hikes will be necessary to hit their target inflation rate of 2%. In fact, many experts predict increases throughout 2022 (at each of the Fed’s remaining meetings) with the next anticipated hike happening in November. The remaining meetings on the Fed calendar are in November and December.

For consumers, this means financing of many kinds – including credit card debt, car loans and mortgages – will become more expensive.

This isn’t the first time the Fed has changed the federal funds rate. It has a history of rate increases – and decreases – because various events throughout time have made them necessary. Here’s what the past decades have looked like in the economy and mortgage industry since data became available from Freddie Mac in 1971. The average annual mortgage rates used are for 30-year, fixed-rate mortgages.

The 1970s

Average mortgage rates fluctuated between 7.5 – 9% for most of the decade due to several factors, including energy crises and decisions made by the government. With a focus on unemployment, the Fed adopted a stop-go policy that would lower interest rates to increase inflation and lower unemployment, then turn around and raise rates to lower inflation. The attempt proved fruitless as, by the end of the decade, both unemployment and inflation were high. In 1979, mortgage rates shot up to just over 11%.

The 1980s

With a new chairman, the Fed focused on combating inflation, which was at 13.5% in 1980. This effort to tighten the money supply caused interest rates to rise dramatically and the country entered a recession in 1981. At this time, the average annual mortgage rate was at its highest in recorded history, 16.63%. However, by 1989, mortgage rates and inflation were down to 10% and 4.82%, respectively.

The 1990s

The ’90s saw a decrease in both inflation and interest rates. The decade saw an economic boom thanks, in part, to an acceleration of productivity that many feel is due to the internet and other technological developments. By the end of the decade, mortgage rates were just under 7%.

The 2000s

The country entered the new millennium on a high from the economic boom and technological advances of the ’90s, but was quickly brought down when, first, the tech bubble burst in March 2000 and then the September 11 attacks shocked the world in 2001. The decade delivered another blow when, in 2007, the country entered into the Great Recession, one of the worst economic downturns in U.S. history. In 2009, the country actually experienced deflation (a negative inflation rate). To help stimulate the economy, the Fed slashed interest rates to near zero. As a result, average mortgage rates fell to just above 5%.

The 2010s

Still recovering from the end of the previous decade, borrowing costs remained low in the 2010s, with annual average mortgage rates ping ponging between 4.69% and 3.65%. By 2019, the annual average was 3.94% and inflation was under 2%.

The 2020s

We’re only a couple years into the 2020s, but we’ve already experienced global events that have impacted the economy in a big way. COVID-19 spread in the United States, and the entire country went into lockdown. In response to the pandemic, the Fed lowered rates to near zero. For the first time, the 30-year fixed rate dropped below 3%. However, this was never going to be a permanent fixture – especially when the true impact of the pandemic started to show.

COVID-19 created a lot of issues, from supply chain disruptions and staffing issues to surging production costs and high demand of products and services due to financial help from the government. All of these have a role to play in the dramatic rise of inflation. And now, with Russia’s invasion of Ukraine and the resulting sanctions, oil prices have skyrocketed, contributing more to inflation, which is now at a 40-year high. As you’ve seen in the country’s history, when inflation is high, rates go up – and so, the Fed has and will continue to raise rates in 2022.

As you can see, the Federal Reserve’s influence on mortgage rates can be significant. It sets the federal funds rate, which is the interest rate lending institutions pay to borrow money. If it costs lenders more to borrow money to lend, then they, in turn, must charge more for their customers to borrow from them. This causes interest rates on loans, including mortgages, to go up.

Keep in mind, too, that there are other factors that influence mortgage rates and that not everyone will get the same rate. Credit score, loan amount, down payment, loan term and loan type will all influence an individual’s mortgage interest rate.

The rising Fed interest rates can have a major effect on home buyers. High rates mean you pay more interest, which can reduce your buying power because you won’t be able to borrow as much money. That’s because less money will be going to paying your principal (the amount you borrowed) and more money will be going to paying your interest.

For example, the monthly mortgage payment for a 30-year mortgage on a $200,000 loan at a 6% rate is $1,199. If the interest rate were 3%, you could buy a $285,000 home for the same monthly payment. (Keep in mind, this doesn’t include property taxes and insurance.)

There could be a benefit for home buyers who’ve been dealing with high home prices and an extremely competitive market. Higher interest rates could help decrease the demand that is currently driving up prices. If you’re a home buyer, keep an eye on the local market and consider locking your rate when you’re ready to move forward.

Remember, too, that just because you qualify for a certain amount doesn’t mean you should borrow the maximum. Take the time to work through how much house you can afford, including monthly payments. Work with your lender to get an estimate of what your monthly mortgage payment could be with different loan amounts and various interest rates.

Because it may be more expensive to get a mortgage, some buyers may decide to wait. So, while the Fed rate hike could make a home harder to sell, many people still need to buy homes. Buyers have been struggling to find homes for a long time and might still be eager to buy.

However, if it costs more to borrow money and that pairs with a decrease in housing demand, you may not get the astronomical offers you were hoping for or that other sellers have seen earlier this year.

Mortgage refinancing works by essentially paying off your current mortgage with a new mortgage – basically trading in the old for the new – which may come with a new interest rate, term and/or loan amount. If the interest rate on your mortgage is lower than current rates, you may end up getting a higher interest rate when you refinance, and your monthly payment may go up. However, there are still reasons to refinance.

People have different goals for refinancing. Some refinance to use some of the equity in their homes, while others refinance to change their interest rate or the length of their loan. When rates dropped to historic lows in 2020 and 2021, many people refinanced their loans to get a lower interest rate.

While rates are higher now, some people may still be able to benefit from a refinance. If their rate is higher than today’s mortgage rates, now could be the time to refinance to a lower rate. And since home values have recently skyrocketed, homeowners may have more equity in their homes at the moment, which means they may be able to take more cash out. If you have equity in your home and are wondering if this is the right move to make, use a cash-out refinance calculator to see how it can benefit you.

If you’re seriously considering a refinance, talk to your lender to see if it’s smart to refinance now.

Mortgage rates are not stagnant. They can change daily. And, with where we stand now, rates are predicted to keep rising. You don’t want to start with one rate and, by the time the process is over, have a higher rate when you close your loan.

That’s why a mortgage rate lock is important. A rate lock allows you to secure your interest rate at the time you apply, so that it stays the same when you close – even if rates go up.

However, it’s important to keep in mind that the rate you lock will also stay the same even if rates drop. Rate locks also have expirations, so be sure to discuss the timeframe with your lender.

The outlook on the current state of the housing market can be a bit overwhelming at first glance, with continued high demand, low inventory, increasing prices, high inflation, increasing interest rates and additional rate hikes in the future. However, there is hope that due to rising rates, home budgets may decrease, meaning sale prices will have to decrease too. This may also, hopefully, help stabilize the supply and demand issues we’re currently facing.

Still uncertain about how this year’s rate hikes impact you? We’ve got answers to your frequently asked questions.

What does the fed rate hike mean?

For borrowers and consumers, the fed rate hike means that many types of financing will cost more due to higher interest rates. Adjustable-rate loans, such as ARMs (that are no longer in the fixed-rate period) and credit cards with variable rates, often see higher interest rates when the Fed hikes their benchmark rate.

If you have an existing fixed-rate loan, the amount you pay in interest will not be affected by fluctuations in the federal funds rate.

What happens when the Fed interest rate rises?

Increases in the federal funds rate tend to cool down the economy, thanks to higher interest rates that make borrowing more expensive. As a result, the Fed’s interest rate rises can discourage spending and increase annual percentage rates on savings.

When will the Fed announce rate hikes?

The Federal Reserve’s Federal Open Market Committee (FOMC) holds eight regularly scheduled meetings each year. During these meetings, the Committee reviews the economic and financial conditions of the country, and it determines monetary policy moving forward. The Fed announces any changes they’ve made to the federal funds rate after it meets.

Some financial experts anticipate that the Fed will announce additional rate hikes at each of the Fed’s upcoming meetings this year.

Throughout history, the Fed has raised and lowered the federal funds rate to counteract certain events and the resulting economic swings. When the Fed moves the needle in either direction, it directly and indirectly impacts interest rates on consumer loans, including mortgages. In 2020 and 2021, many people benefited from historically low rates. Now, in an effort to combat inflation, the Fed is raising rates – and is expected to continue to do so throughout 2022.

While higher rates are the new reality, buying and refinancing can still make sense and be affordable for many buyers and homeowners. If you’re unsure what move to make, talk to a Home Loan Expert today to see if a purchase or refinance makes sense for you. And if you’re ready to act before rates move higher, consider applying today and locking in at a lower rate soon.