Feb 01 2023

What 2023’s first Fed hike means for homebuyers


The Federal Reserve just raised its rate for the first time in 2023. Many homebuyers have questions.

Although inflation has shown signs of cooling, the Federal Reserve, the U.S. central banking system, is not done pumping the brakes. Today, the Fed has announced a smaller benchmark rate increase than what was seen in 2022. Many view this as a promising indicator that aggressive rate hikes have come to an end, and rate cuts in the second half of the year may even be possible. 

Is this good news for homebuyers? Let’s take a closer look.

3 things to know about the latest Fed rate hike

Right now, it’s helpful for homebuyers to keep in mind that:

1. These rate increases have a purpose.

Although another Fed rate hike may sound bad, especially if you’re in the market for a house, know that there is a method to the madness:

  • This latest Fed rate increase, as well as all others leading up to it, is intended to help strengthen the bond and stock market.
  • It signifies stability to these markets, showing that the Fed is actually adjusting to historic levels of inflation and not just taking a “wait and see” approach.
  • The end result is to make borrowing more expensive, with the ultimate goal of reducing the amount of money circulating in the economy. (To get a better idea of exactly how a higher federal funds rate affects the cost of many types of borrowing, read this breakdown.)

Remember, a Fed rate hike impacts mortgage rates indirectly. And so, another increase isn’t likely to cause mortgage rates to surge. But, lenders will continue to look to the Federal Reserve’s economic forecast, as well as other indicators of future rate hikes. This outlook can contribute to the movement of mortgage rates in either direction. Mortgage rates are expected to stabilize once the Fed gets a handle on inflation.

“While mortgage market activity has significantly shrunk over the last year, inflationary pressures are easing and should lead to lower mortgage rates in 2023,” Sam Khater, Freddie Mac Chief Economist, confirms.*

Good to know: The Fed rate hike will most immediately affect homeowners with Adjustable-Rate Mortgages (that have passed the initial fixed period) and HELOCs, or home equity lines of credit.

2. Mortgage rates are still below the historical average.

The good news is that even though mortgage rates have moved up, they’re nowhere near where they were just a few decades ago.** If mortgage rates moderate as expected in 2023, buying power will get a boost; a lower rate helps to lower a monthly mortgage payment.

Homebuyers are reacting to recent rate increases in two different ways. Some are choosing to buy a house now and lock in today’s rate before it rises any higher, with the option to refinance if rates drop in the future. Others are opting to wait and see if rates decline. Whatever decision you’re leaning toward, now is the time to connect with a Loan Officer, crunch the numbers, and determine your smartest option.

Good to know: While experts have predicted that mortgage rates may soon decline, rates aren’t expected to reach rock-bottom pandemic levels.* The housing market is returning closer to its pre-pandemic state, and mortgage rates remain historically “below average.”**

Affordable mortgages are out there. It just takes an expert to find them. Connect with your local Academy Loan Officer for guidance.

3. It’s a good time to pay down debt.

One course of action that most financial advisors can agree on considering a Fed rate hike is this: Prioritize paying off high-interest debt if you’re able.

This is because:

  • Credit cards typically have a variable interest rate, which is directly tied to the Federal Reserve’s benchmark rate.
  • Short-term borrowing costs have already begun to rise, triggered by multiple rate hikes throughout 2022.
  • Credit card rates have the potential to rise in the year ahead. “It’s very important that people are aware that their credit card rate is going to go up. And if you do have credit card debt, it’s time to take steps to get rid of that,” Beverly Harzog, U.S. News & World Report finance analyst, says.

Not only will paying down high-interest debt save you money—it could make it easier to qualify for a mortgage. Recent numbers show that U.S. households are carrying an estimated $925 billion in credit card debt.

Good to know: Reducing your DTI (debt-to-income ratio), if you’re able, indicates that you can better handle a monthly mortgage payment.

You don’t have to put your house hunt on hold.

You only need to reach out to a local mortgage expert for guidance. Academy Mortgage Loan Officers are skilled at navigating today’s complex market and coming up with customized solutions. Find one near you and talk through your options.

This is for informational and educational purposes only. Please consult a trusted professional as personal circumstances may vary. No specific results are guaranteed. Not all applicants will qualify. MAC2501-2180812.