When purchasing a new home, there are several factors to consider. Among them are a school district, location, and price. But wait, what exactly is the Federal Reserve rate hike? Not to worry, read on to understand the Federal Reserve rate hike and how it might affect you and the purchase of a new house. 

The Fed Rate Explained

The US federal funds rate is the interest rate where banks and credit unions lend reserve balances to other banks and credit unions overnight on lending agreements, in this case un-collateralized. Still, doesn’t make sense? Don’t worry; most people don’t understand the concept either.

The Federal Reserve, which is the US’s central bank, can determine the rate of interest on loans, even loans that the US government makes to itself. If the rates go up, banks are less likely to lend money, and when the rates are low, banks are more willing to loan money. This system was created by Alexander Hamilton, the first US Secretary of the Treasury.

To stimulate the economy, the fed fund rates are lowered. During 2008, the rates were reduced and remained at a .25 percent till late 2015. Since then the rate has been raised four times, the last in June 2017.

How Does it Affect Me?

The fed rates affect people eventually. When asking for loans during a bad economy, the rates are low making it easier to obtain a loan from banks. In a healthy economy, the opposite is true. Asking for a loan from a bank is harder to do because it is considered to be a risky procedure.

For consumers, the Home Equity Line of Credit is affected. This line of credit uses the Prime Rate which is tied to the Fed Funds plus three percent. Currently, the Fed Rate is 1.25 percent, and anyone with the Home Equity Line of Credit now has a rate of 4.25 percent.

What Happens Next?

For now, traditional mortgages are holding level for 2017. This could change, however, as the year passes. The demand for mortgage bonds has remained consistent, holding the rates low. Banks consider these bonds to be a good and safe investment.

As the year ends, the rates could slowly start to rise. But projections are changed monthly as the economic and political climates continue to change. If you are looking for a loan to purchase a house, consider getting a loan now.