Earlier this month, I mentioned that the Fed was likely to hold the benchmark interest rate steady at two percent for the rest of 2008. However, after analyzing the minutes of the Federal Open Market Committee today, I want to introduce one caveat to potential buyers and borrowers in the market; the Fed’s next move is anticipated to be an increase.
The Expectation
We’ve seen it with home prices, and we will see it happen to the fed fund rate - except in this case, we have nowhere to go but “up”. Since Bernanke’s last campaign to get a hold of this credit crunch, the benchmark rate has been held steady at two percent. But as policy makers expect to make a move to eventually slow down inflation, we should expect the fed fund rate to slowly climb back up.
Now according to a report by Bloomberg, analysts predict a “92 percent probability that rates will stay steady during the next FOMC on September 16 and a 83 percent probability for the October 28-29 meeting.” So while most agree that the increase will not be anytime this year, the increase would not come as a surprise if it rates increased in the beginning of next year.
Your Assessment
First, figure out how this expectation will soon affect you - yes, I’m talking about those HELOCs. I’ve mentioned it before, but this benchmark rate has a direct effect on your interest rate which means higher monthly payments. As a result, if you were considering a HELOC, you should definitely keep in mind this piece of news and analyze the recent trends of this key rate. While this volatility is expected among HELOCs, take advantage of this knowledge beforehand to carefully plan your next financial steps.
To learn more about HELOCs, such as how they are issued and structured, be sure to check out my post from last week.
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Ever since the Fed Funds Rate has been dropping since last October, the popularity of HELOCs has grown significantly. Now, while popularity has grown, availability is still another story. With tightening guidelines and slipping values in California, HELOCs have been a little tougher to qualify for lately. Fortunately, the Fed Funds Rate has made HELOCs much more affordable and thus quite popular. If you were considering a HELOC or currently have one already, here is a piece of news that you may find interesting.
Holding steady, but expect increases next year
Currently the Fed Rate has held steady at 2% since May 2008, while the Prime rate has also held steady since May 2008 at 5%. Today, analysts have agreed that the Fed Funds Rate should hold steady for 2008 but can expect an increase sometime next year.
Keep a Close Eye on that Fed Rate
Based on analyst expectations, those with HELOCs can stay comfortable for a bit longer as it seems there is no immediate rush to increase rates yet. Those who are considering HELOCs should then keep in mind that the advertised and quoted rates are based on today’s market with no guarantee of the future. With these analyst expectations in mind, it is very likely you can expect to pay more for your HELOCs as soon as next year.
Consider the History of the Fed Fund Rate
If you take a look at the historical charts of the Fed Fund Rate, you can see that fluctuations can be quite volatile. Consider that in June of 2003, the Fed Rate was at 1.00% - and by June of 2006 it had climbed to its peak at 5.25%. Now based on the current market, we can’t expect to see the trends we saw during 2001-2006. But either way, those in the market for HELOCs should remember that the Fed Fund Rate is a key component of their interest rate and thus keep them under a close watch. For more information about finding a HELOC for you, make sure you get the best deal and read “How to Shop For Your HELOC”.
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