The Fed's Latest Rate Hike May Not Be Bad News for Mortgage Borrowers. Here's Why

It may not necessarily get more expensive to borrow for a home.

The Federal Reserve has been on a mission to cool inflation since last year. In 2022, the central bank raised interest rates seven times. And on March 22, the Fed hiked up interest rates by 0.25% for the second time this year.

If you're looking to buy a home, you may be worried that this recent rate hike will make it even more expensive to take out a mortgage. But actually, you may not need to worry so much.

Federal Reserve rate hikes don't tend to influence mortgage rates

One big misconception about the Federal Reserve is that it sets consumer interest rates, like the rates credit cards come with. That's not true. Individual credit card issuers and lenders set their own interest rates.

Rather, the Fed is tasked with setting the federal funds rate. That's the rate banks charge each other for short-term borrowing. However, when the federal funds rate increases, it tends to drive up the cost of consumer borrowing in most categories.

Mortgage loans, however, happen to be the exception. Mortgage rates commonly rise and fall in accordance with the 10-year Treasury rate (meaning, when the 10-year Treasury bond goes up, mortgage rates tend to follow suit, and vice versa). But interest rate hikes by the Fed don't always nudge the 10-year Treasury, which means mortgage rates aren't necessarily influenced by them.

To put it another way, this recent rate hike on the part of the Federal Reserve might make your credit card balance more expensive, and it might result in a higher interest rate when you go to sign an auto loan or personal loan. But it won't necessarily result in a higher mortgage rate if you're planning to buy a home in the next few months.

Now that said, mortgage rates happen to be relatively high right now. So that's something you'll need to consider when determining how much house you can afford -- or if you can afford to buy in the first place. 

It's also possible that mortgage rates will rise in the coming months. But they might fall, too. And in either case, you probably won't be looking at too drastic a swing -- though you technically never know.

Is now a good time to buy a home?

Between higher home prices and elevated mortgage rates, some buyers might struggle in today's housing market, even though it's been cooling. As a general rule, your housing costs, including your mortgage payments, property taxes, and homeowners insurance premiums, should not exceed 30% of your take-home pay. So if you bring home $5,000 a month after taxes, your housing costs should, ideally, amount to $1,500 or less.

If you're able to stick to that guideline, then you may be more than able to afford a home. But if you can't, then you may want to wait to buy. 

In addition to higher home prices and mortgage rates, housing inventory happens to be really low right now. So you might struggle to find a home that meets your needs -- and that's in addition to potential issues with affordability.