Mortgage news
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US central bank boss says he plans to raise rates!
Speaking in front of Congress, Jerome Powell said he's in favor of a 0.25 point increase, aimed at tackling the surging cost of living. Analysts expect a rate hike in March, which would be the first since 2018. Mr. Powell admitted that he was open to further interest rate increases further down the line if inflation, which measures how quickly the cost of living rises over time, remains "persistently high." The chair recognized that "high inflation imposes significant hardship" on people and said the Bank will use all its tools to ensure the increased prices do not become "entrenched". He cautioned, however, that the invasion of Ukraine, and sanctions imposed by Western countries, create a great deal of uncertainty around the prices of wheat, oil, and other goods.
What Is an Interest Rate?
Interest rates are the cost of borrowing money. It is the amount a lender charges a borrower and is a percentage of the principal—the amount loaned. The interest rate on a loan is typically noted on an annual basis known as the annual percentage rate (APR). Most mortgages use simple interest. However, some loans use compound interest, which is applied to the principal but also to the accumulated interest of previous periods.
A borrower that is considered low risk by the lender will have a lower interest rate. A loan that is considered high risk will have a higher interest rate.
A mortgage is likely to be the largest, longest-term loan you’ll ever take out to buy the biggest asset you’ll ever own
· The home is used as collateral. That means if you break the promise to repay your mortgage, the bank has the right to foreclose on your property. Your loan doesn’t become a mortgage until it’s attached as a lien to your home, meaning your ownership of the home becomes subject to you paying your new loan on time at the terms you agreed to.
· You will sign a lot of documents with paragraphs of legal language to obtain a mortgage, including a promissory note, and in many states, a deed of trust. Here are some common terms you’ll need to know if you’re getting a mortgage:
Promissory note. The promissory note, or “note” as it is more commonly labeled, outlines how you will repay the loan, with details including:
· Your interest rate
· Your total loan amount
· The term of the loan (30 years or 15 years are common examples)
· When the loan is considered late
· Your monthly principal and interest payment
“How Are Interest Rates Determined?
The interest rate charged by banks is determined by a number of factors, such as the state of the economy. A country's central bank (the Federal Reserve in the U.S.) sets the interest rate, which each bank uses to determine the APR range they offer. When the central bank sets interest rates at a high level, the cost of debt rises. When the cost of debt is high, it discourages people from borrowing and slows consumer demand. Also, interest rates tend to rise with inflation.1
To combat inflation, banks may set higher reserve requirements, tight money supply ensues, or there is greater demand for credit. In a high-interest rate economy, people resort to saving their money since they receive more from the savings rate. The stock market suffers since investors would rather take advantage of the higher rate from savings than invest in the stock market with lower returns. Businesses also have limited access to capital funding through debt, which leads to economic contraction.
Economies are often stimulated during periods of low-interest rates because borrowers have access to loans at inexpensive rates. Since interest rates on savings are low, businesses and individuals are more likely to spend and purchase riskier investment vehicles such as stocks. This spending fuels the economy and provides an injection to capital markets leading to economic expansion. While governments prefer lower interest rates, they eventually lead to market disequilibrium where demand exceeds supply causing inflation.
Federal Reserve: Expect 3 interest-rate hikes in 2022
The Federal Reserve on Wednesday announced that it is accelerating its removal of monetary support for the economy, citing a rise in inflation that has seen the biggest jump in prices nearly 40 years. In a move to cool growth, policy makers also said they expect to hike interest rates three times in 2022.
"Employers are having difficulties filling job openings, and wages are rising at their fastest pace in many years," Federal Reserve Chair Jerome Powell told reporters on Wednesday. Inflation has been rising as supply chains are disrupted by the coronavirus, he said.
"The inflation that we got was not at all the inflation we were looking for," Powell said.
Projections released by the central bank predict three interest-rate hikes next year and three more in 2023. That's significantly more than the single rate jump it had forecast in September and indicates the central bank is much more concerned about rising prices than it was two months ago. Economists said the rate hikes could begin as soon as March, but some expect economic weakness to push lift-off until the summer.
Asked about the change in attitude, Powell told reporters: "It's essentially higher inflation and faster, much faster progress in the labor market."
He also noted that high inflation could dampen the economic recovery by canceling out the wage gains that lower-paid workers have made in recent months amid a widespread labor shortage.
"We have to make sure that higher inflation doesn't get entrenched. It's one of the two main threats, the other being the pandemic, to getting back to maximum employment," he said.
