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Fed holds interest rates steady

By Marcie Geffner – LendingTree.com

The Federal Reserve decided last week to keep its key interest rate unchanged at 2 percent. That’s good news for home buyers and homeowners who feared an increase in the benchmark federal-funds rate might trigger higher interest rates on home loans.

The Fed held steady because it is trying to balance the different pressures on the U.S. economy. On the one hand, the Fed suggested in its statement, the economy has been strong enough to continue growing and withstand the current risks. But on the other hand, the Fed statement noted, "the upside risks to inflation and inflation expectations have increased" and "uncertainty about the inflation outlook remains high." Inflation, which refers to higher prices, is one of the Fed’s chief concerns.

The Fed doesn’t directly set the interest rates that borrowers pay on home mortgages, auto loans or credit cards. But the Fed’s actions indirectly affect the rates that lenders charge on those loan products. Nonetheless, interest rates that you’ll pay on your loans could change even though the Fed decided to hold to its current course and neither raise nor lower its key rate.

Homeowners who have an adjustable-rate mortgage (ARM) should be especially diligent about the outlook for higher interest rates. Find out when your ARM will reset and how much your monthly payments might increase at that time. If you’re concerned about the risk of even higher payments in the future, you might want to refinance your ARM with a fixed-rate mortgage.

If you’re shopping for a home or want to refinance your current mortgage, be sure to discuss the interest rate outlook with your loan officer.

The bottom line for borrowers is that higher interest rates on home loans may still be on the horizon despite the Fed’s inaction this week.

© 1998 - 2008 LendingTree, LLC. All rights reserved. This story, "Fed holds interest rates steady," is reprinted by the author with written permission of LendingTree, LLC.

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