Houston Chronicle

With Fed rate hike, some win, some lose

- By David W. Myers KING FEATURES

The widely expected increase in short-term interest rates by the Federal Reserve Board likely will have an uneven impact on borrowers across the nation.

Q : Our newspaper has been filled with stories lately about the Federal Reserve Board planning to raise shortterm interest rates. Why would it do this when the housing market is getting better?

A : The rate-setting Federal Reserve works in mysterious ways, but its members usually make the right decisions.

Fed chairwoman Janet Yellen recently said that it likely would be “appropriat­e” to raise short-term interest rates before the end of this year, perhaps as early as next month. Raising rates curbs borrowing by companies and individual­s alike, which slows the economy and keeps it from overheatin­g.

Homeowners who have adjustable-rate mortgages or those with adjustable home-equity credit lines would feel the pain of a Fed rate hike almost immediatel­y. That’s because rates on most ARMs rise or fall quickly in tandem with the short-term rates that banks pay to borrow from the government.

Introducto­ry rates on the popular 5/1 ARMs — which have a below-market fixed rate for the first five years of the loan and then automatica­lly convert to a rate that typically adjusts once a year for the remainder of the term — recently stood at about 3.5 percent. If the Fed raises short-term rates by one-half of 1 percent and banks pass along the increase to new borrowers, it would tack on $42 a month to the payments on a 30-year, $150,000 loan.

Oddly, though, an increase in the Fed’s short-term interest rate actually might push down the cost of new fixed-rate mortgages. That’s because fixed-rate loans tend to track rates on longerterm Treasury bonds and notes.

If a Fed rate hike convinces investors that inflation will remain under control over the next several years, they won’t demand higher yields and might even consider accepting less, which theoretica­lly should translate into a drop in rates on new fixed-rate mortgages for future buyers and refinancer­s.

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