INSIDE INFORMATION
COMPILED BY ERIC WEILBACHER
2023 HOME EDITION
RATE CHANGES The Federal Reserve can combat in ation by increasing interest rates or stimulate the economy by lowering them. Over the past 20 years, the rate has uctuated between 0% and 5.25%.
Peak interest rates
6%
2003 After the 2001 recession, interest rates begin to climb up as the economy recovers.
As market values have decreased over the last year, interest rate increases from the Board of Governors of the Federal Reserve System Federal Open Markets Committee have continued. Interest rate increases occurred after almost every meeting of the group for the past 14 months. HOW IS YOUR INTEREST RATE DETERMINED? When applying for a mortgage or other type of loan, the federal funds rate serves as the baseline for determining an interest rate. FEDERAL FUNDS RATE Current rate target: 5%-5.25%* What is it? This is the interest rate banks use to lend money to each other overnight. Banks are legally required to keep a certain percentage of their customers’ money on reserve, prompting banks to aim for keeping enough money on reserve without going under their limit. Why change the rate? This is used by the Federal Reserve to both control the supply of money available and keep in ation in check. As the rate goes up, it becomes more expensive to borrow money or take out a loan. *AS OF JUNE 14 CALCULATING AN INTEREST RATE A bank or mortgage lender will base its best rate—or prime rate—o of the uctuations in the federal funds rate. What is the prime rate? The prime rate is usually determined by adding three points to the federal funds target rate, but that can vary depending on the bank and other factors, according to Bill Chittenden, associate professor of nance at Texas State University. Current 30-year xed rates dropped slightly in June from a high of 6.79% to 6.71%, according to Freddie Mac, the Federal Home Loan Mortgage Corporation. Chittenden said for a homebuyer who has a budget of $1,500 for a monthly payment, that buyer could a ord a roughly $350,000 mortgage two years ago. Due to increases in the federal funds rate, that same monthly payment could only get them a $260,000-$270,000 home in the current environment.
5%
2022 The Federal Reserve begins ratcheting up rates in response to record in ation.
4%
2020 In response to the economic fallout of the coronavirus pandemic, rates are again slashed to e ectively zero.
3%
2008 In response to the 2008 Great Recession, interest rates are slashed.
2%
1%
0%
SOURCE: FEDERAL RESERVE COMMUNITY IMPACT
WHAT CAN I AFFORD? Mortgage interest rates determine the monthly cost of a home. These examples are based on reported average interest rates by Freddie Mac each June from 2020-23 with a conventional 20% down payment and a 30-year xed mortgage. The following does not take into account property tax rates, homeowner insurance, homeowners association fees or other costs that go into a total monthly payment.
Home cost: $350,000 20% down Payment: $70,000 Loan term: 30-year xed Monthly principal and interest payment
June 2021: $1,183 (3.02%) June 2022: $1,634 (5.75%) June 2023: $1,808 (6.71%)
SOURCES: FEDERAL RESERVE, CONSUMER FINANCIAL PROTECTION BUREAU, FREDDIE MAC COMMUNITY IMPACT
SOURCE: FREDDIE MAC COMMUNITY IMPACT
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NORTH NORTHWEST AUSTIN EDITION • AUGUST 2023
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