House Rules: Why it's Still a Good Time to get a Home Loan

by Emily Kerr
LoanPage Columnist

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You might be thinking with the interest rates going up that you'll wait on buying a home. Why look at home loans when interest rates are going up? But it's still a good time to consider getting a home loan. Before the Federal Reserve began raising rates, interest rates on home loans were the lowest they'd been in years.

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Home Loan Interest Rates may Change

In September the Federal Reserve Board raised interest rates despite the blow to the economy caused by hurricane Katrina.

What does it mean when the Federal Reserve raises interest rates? Actually, the Federal Reserve doesn't raise rates. It doesn't have the power to. What the Federal Reserve does is raise and lower the target rate by buying and selling Treasuries and Federal agency securities. If the Federal Reserve wants to slow the economy, they'll raise the target rate by selling Treasuries and securities, which contracts the nation's money supply. If they want to lower interest rates, they buy, increasing the money supply.

Because the interest rate banks and lenders charge their customers and the rate on which your home loan will be based is tied to the target rate set by the Federal Reserve, interest on home loans will increase when the Federal Reserve raises interest rates. Short-term rates, such as those charged on adjustable rate mortgages, are affected, as are home equity loans.

Finding a Home Mortgage Product

But even with the recent increase in interest rates, you can still find lenders who offer lower rates than their competitors. You just need to do your homework on your home loan. Rather than looking at a fixed rate loan, look at an adjustable rate mortgage, which has lower rates. With an adjustable rate mortgage your monthly payments will increase if interest rates increase and will decrease when interest rates fall. With a fixed rate your interest rates won't increase when the Federal Reserve raises interest, but you could be locked in long-term to the higher interest rate you signed up with initially unless you refinance your home mortgage.

If you do your homework, you can find a home mortgage that's right for you.

Sources:

CNN Money
CNN Money Your Home


About the Author

Emily Kerr is a freelance writer with over 425 articles in print. She writes about topics from home financing to home construction.

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