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Federal Reserve Is Set to Increase Rates, Expert Warns of Sudden Reactions

Posted by Vanilou Jane Gucor on Feb 21, 2016 07:29 PM EST
Janet Yellen Testifies Before House Financial Services Committee more big
Caption:WASHINGTON, DC - NOVEMBER 04: Federal Reserve Chair Janet Yellen testifies before the House Finance Committee in the Rayburn House Office Building November 4, 2015 in Washington, DC. Because the Obama administration has yet to appoint a vice chairman for supervision at the Federal Reserve -- as madated by the Dodd-Frank Law -- Yellen is assuming the semi-annual duty for reporting to the committee on the Fed's 'supervision and regulation of the financial system.' (Photo : Chip Somodevilla/Getty Images)

According to a report from NBC News, the Federal Reserve's announcement about rate increase had a big impact on sellers and potential home buyers. Because of this, the experts has four words for everyone: "Don't do anything rash!"

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The Fed was expected to raise the federal rate from 0 to 0.25 percent to 0.25 to 0.50 percent. This movement is said to be the first time in almost a decade, and this was done to keep the economy from overheating. By the time Fed rates climb, interest rates for consumer loans such as mortgages will also climb as well.

A small increase in interest rates could mean a lot for buyers because more money would be required to pay over the life of the loan. This is because mortgages are longer term than many other loans. Many experts said, moving quickly to try to lock in lowest rate may not help, because the rates depends on the overall financial picture.

Peter Lazaroff, Plancorp's Wealth Manager and Director of Investment Research, said, "Homeowners should not accelerate or decelerate their purchase decisions based on a market forecast."

"All markets, including interest rates, are forward looking. That means that debt prices have already built in expectations for slightly tighter monetary policy," he added.

On the other hand, Melanie McShane, an independent real estate broker based in Southern California, said that if a person is really serious about buying a home, then there is no need to stop moving.

She said, "I've been in the industry for 11 years now and have seen the impact interest rate fluctuations have on homebuyers."

"As the interest rates move up, the total loan amount that the buyer qualifies for decreases. Typically a buyer has a fixed amount in mind of how much they are comfortable spending monthly. As the interest rate moves up, that fixed monthly payment buys less and less home," she mentioned.

A report from explained that the Fed sets interest rates to control the amount of money sloshing around the Federal funds market. The Fed removes funds from the system through the sale of Treasury Bills it had stored if it wants to increase rates. On the other hand, the Fed buys Treasury Bills, thus debiting money into the bank resulting in lowered interest rates.

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