The Fed announced that short-term interest rates would go up 0.25 percent.
AFN file photo

The Federal Reserve’s recent increase in the key interest rate – and its promise to raise the rate twice more this year – is bad news for aspiring homeowners counting their pennies.

After a stop-and-start approach to raising rates over the past couple of years, it looks like we’re settling in for an upward ride – making new buyers’ monthly mortgage payments a bit more expensive and worsening the existing housing crunch.

The Fed announced that short-term interest rates would go up 0.25 percent. Mortgage rates aren’t the same as short-term interest rates, but they tend to keep a parallel relationship and even anticipate the Fed’s actions.

“If you think it’s been hard so far to find a home that fits your budget and your needs, it’s going to get worse,” said Jonathan Smoke, chief economist for Realtor.com.

That’s because homeowners who already have lower mortgage rates locked in are less likely to trade up or down into new homes that put them in more expensive loans. So, they’ll stay put, he added.

“It’s bad for the market, because that means there will be even fewer homes for sale,” Smoke said.

Interest rates a week ago were 4.39 percent on the average 30-year fixed-rate mortgage, according to Mortgage News Daily. That’s up from near-historic lows of 3.44 percent last summer.

And that means buyers will be shelling out about 3 percent more each month on their loans for a $250,000 home if they plunked 20 percent down. That’s because in anticipation of the Fed hike, mortgage rates have already ticked up just more than a quarter of a percentage point over the past few weeks. In dollars and cents, borrowers would fork over an additional $29 a month, or $348 a year.

“The small changes we’re seeing shouldn’t price too many people out” of homeownership, Smoke said. “But if you keep adding it on, it will price people out.”

The housing crunch will continue to pressure homebuilders to build more. But new homes are typically more expensive than older residences as land, local regulation, labor and materials costs are high and rising in most parts of the country.

“Right now, rents and housing costs are increasing faster than other components [of the economy] because of the stubborn housing shortages in much of the U.S.,” said Lawrence Yun, chief economist of the National Association of Realtors. “More home construction is needed now.”

But buyers shouldn’t panic.

Those hoping to save a few bucks can opt for adjustable-rate mortgages, which generally cost a bit less upfront than 30-year fixed-rate loans, he said. They can refinance those loans later if rates fall. Or they can purchase smaller residences in less expensive neighborhoods.

And even with the bump, “rates are still incredibly low,” said Smoke. Over the past 46 years, they’ve been at an average 8.25 percent. That’s almost twice what it is today.

Mortgage rates have been climbing since the presidential election. In December the Fed announced that it would be raising short-term interest rates a quarter of a percentage point, just the second increase since the housing bust.

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