The Fed Just Raised Rates. Here's What That Means for Mortgage Borrowers

Will you end up paying more for a mortgage this year?

It's a common misconception that the Federal Reserve is in charge of setting consumer interest rates, like the rates borrowers are charged for products like personal loans and mortgages. In reality, the Fed is responsible for the federal funds rate, which is the short-term borrowing rate banks charge one another.

However, the actions of the Fed tend to influence consumer interest rates. And that can be a good thing and a bad thing.

When the Fed raises its interest rates, consumers can see higher rates on loan products and credit cards, which makes borrowing more expensive. On a more positive note, that could also lead to higher savings account and CD interest rates.

On March 16, the Fed raised its interest rate by 25 basis points, or 0.25%, marking the first rate hike in several years. The Fed also indicated it plans to implement six more rate hikes this year.

In light of this, mortgage borrowers should expect to see higher interest rates when shopping around for home loans. But whether that's a completely bad thing is a different story.

Higher rates could lead to less competition

At first glance, the idea of paying more interest on a mortgage might seem like a bad thing. But rising rates could end up having one positive effect on the residential real estate market: They could drive more buyers away. That could, in turn, cause home prices to drop.

Home prices have been sitting at record highs for months on end. As of January, the median existing home sold for $350,300, marking an annual increase of 15.4%, according to the National Association of Realtors.

Compounding the problem is the fact that housing inventory is at a record low. As of the end of 2021, there was a mere 1.6-month supply of available homes on the market. Normally, it takes a 4- to 6-month supply of homes to create an equalized housing market where neither buyers nor sellers have the upper hand.

Because housing inventory has been so low, demand has exceeded it -- and prices have soared. But if rising mortgage rates cause demand to wane, home prices could quickly start to creep downward, making them more affordable for buyers who aren't ready to quit searching for a place of their own.

How to snag a competitive mortgage rate

While borrowers should expect mortgage rates to rise in the course of 2022, there are still steps they can take to snag a better deal on a home loan. First, it's important to shop around with different mortgage lenders, because offers can vary widely from one lending source to the next. Next, borrowers should do their best to boost their credit scores, as lenders tend to grant lower rates to consumers with stellar credit.

Finally, it pays to eliminate or whittle down existing debt before applying for a mortgage. The less debt a given borrower has relative to their income, the more likely a lender is to respond with a lower rate offer.