On December 13, 2017, the Federal Reserve approved a 0.25 percent increase in the federal funds rate, which is the benchmark rate used by lenders when setting interest rates for loans. That moved the target funds rate to 1.25 to 1.5 percent, and Fed leaders noted that they plan three more quarter-point raises during 2018.
If you’re planning to expand your rental portfolio this year, you may be wondering how the steadily increasing federal funds rate may affect your plans—and your profit potential.
While the federal funds rate is not directly tied to mortgage rates, decisions made by the Federal Reserve often influence interest rates on mortgages and other loans. A higher federal funds rate basically means that banks charge each other higher lending rates, which may be passed on to customers applying for credit or loans.
With a private, “borrower-centric” lender like 5 Arch, real estate investors are assured a loan product designed with fast, efficient, and competitive rates that help enhance their portfolios.
How Small Increases Affect Mortgages
A 0.25 percent increase is small, but four such increases in a year’s time would result in a one-point net increase. If you bought a property last year at a 3.75 percent interest rate, and you buy another one later this year for the same price with a 4.75 rate, you’re still getting a good rate but you’re going to pay thousands more in interest over the life of the loan.
Even slightly higher rates can affect the amount you pay in interest, effectively decreasing your profit potential for rental properties. However, the effects are likely to be gradual, and most borrowers will see little change in their interest rates during 2018.
Various forecasters have predicted that the year will end with mortgage interest rates up slightly, but still below 5 percent.
The Silver Lining of Rising Rates
It’s certainly a good idea to keep an eye on interest rates if you have plans to finance new rental properties or updates to your current properties. But the current rate-increasing environment warrants optimism as much as anxiety. That’s because the Fed’s willingness to increase rates means that the economy is doing better and Federal Reserve decision makers expect that it will continue to improve. As a result, more people may be able to pay higher rents at more pristine properties.
Because most borrowers will see little change to their interest rates in the immediate future, now may be a good time to make those investments you’ve been planning. Then as the economy continues to grow, you’ll have your inventory ready to meet the growing demand.
Lock In a Low Rate on a New Investment While You Can: Contact 5 Arch Funding today!