The Mechanics of Rising Rates

Hi Friends,

We all knew this was coming and mortgage interest rates have finally increased significantly. Rates are up over 1% from where they were in December of 2021 due to rising inflation. The Federal Reserve will take action this year to combat the 40-year high inflation by increasing their target interest rate, the Fed Funds, by .75% or more in the coming months. The Fed Funds only impacts one consumer interest rate, the Prime Rate, which directly impacts revolving lines of credit, such as credit cards and Home Equity Line of Credit, HELOCs. The increase to the Fed Funds rate will help fixed mortgage rates because the markets will see the Fed action as helping to fight inflation, which will cause more money to flow into the bond market, which will reduce the bond yields and reduce fixed mortgage interest rates. Eventually, mortgage rates will follow the Fed Funds rate and continue to increase but in the short term, mortgage rates tend to fall when the Fed increases the Fed Funds rate to fight rising inflation.


There are some indications that the economy will head into a recession in 2023 or 2024 so there may be another reprieve for mortgage rates going lower in the next year or two. It is still unlikely that we will see the historically low mortgage rates we experienced in 2020 through 2021. Any 30 Year Fixed mortgage rate below 5% APR is still a historically low interest rate. We have all been spoiled by the sub 3% APR 30 Year Fixed rates of the last few years. Hopefully most of you have taken advantage of the low-rate environment of the past few years and have managed to refinance your mortgages. Despite the long hours I have worked the last few years I was also able to carve out the time to take advantage of the historically low mortgage rates by refinancing the mortgages on my properties. If you are not sure about where your mortgage rat