Source: Jeff Ostrowski | MSN.com | September 14, 2020
The Federal Reserve’s interest rate decisions influence the rates you pay for home equity loans, HELOCs and adjustable-rate mortgages. While the central bank has signaled that low rates are here to stay, if you have a loan with a variable rate, you should understand the stakes.
The Fed is responsible for setting the federal funds rate, the interest rate banks charge each other for overnight loans to meet reserve requirements.
Home equity loans and HELOCs: The prime rate is another benchmark rate, and it tends to be 3 percentage points higher than the fed funds rate. Many lenders tie the rates on home equity loans and HELOCs to the prime rate. When the Fed changes the fed funds rate, loan rates go up or down, including the prime rate, depending on the Fed’s decision.
Adjustable-rate mortgages: Rates on many ARMs now are tied to the Secured Overnight Financing Rate, or SOFR, which has replaced the London Interbank Offered Rate, or LIBOR. Because the Fed’s rate decisions serve as a basis for savings instruments, raising or lowering the fed funds rate can cause SOFR to go up or down, meaning ARM rates will go up or down as well, depending on when the loan resets its rate.
What ARM borrowers should know about the Fed: ARMs have variable interest rates, which float up or down with the fed funds rate. This means if the fed funds rate goes up by a quarter of a percentage point, your ARM rate will increase as well at the next reset. However, there are caps on the amount of interest you’re on the hook for. Continue reading the rest of the article here
About 
Speak Your Mind