Vail Daily column: What might happen if the Fed raises interest rates? | VailDaily.com

Vail Daily column: What might happen if the Fed raises interest rates?

When the Federal Reserve Board meets Dec. 15, all eyes will be on if it finally takes the plunge and raises interest rates on the cost for banks to borrow from the Federal Reserve. In reality, that is the only rate the Fed actually controls, but it is seen as a bell weather and benchmark for many other interest rates out there.

What that means to consumers in the short term is that business borrowing costs will go up, as the Fed rate hike will dictate it costs banks more to raise the capital it takes to lend to businesses, and businesses will eventually pass on those costs to consumers.

Another impact on consumers will be to adjustable rate mortgages, and there are a lot of those out there. Those loans are tied to short-term rates and have been very, very cheap the past several years. That party will end really abruptly once the Fed raises short-term rates.

Generally, Wall Street will wring its hands and see a rate hike by the Fed as a threat to economic growth because cheap money is a large part of what keeps the economy growing. The stock market will swoon, and investors will buy bonds because of their stability. Bonds dictate mortgage rates, and an influx of cash may lower mortgage rates. But note I said generally, not always.

The opposite effect could be that this will serve as a confirmation from whatever higher power the Fed may be perceived as, and stocks will take off. In that case, money will flee the bond markets and both short-term and long-term rates will move upwards. That would be an event I’ve never seen in my 21-year career in the mortgage business, but one that economists whisper could be the surprise “morning after” effect of such a move.

In the event the Fed voted to keep things unchanged, that could be a boost for the markets and money would flee bonds into stocks and long-term rates could increase.

During the past month, we have seen mortgage rates increase by about 0.25 percent, but this week they dropped by about 0.125 percent for most loan scenarios. This is I think due to the uncertainty out there over what might happen in the stocks, and at the end of the day, investors are always more concerned about the return of their money than the return on their money and bonds may suddenly turn into a long-term strategy from a short-term play, but your money will always be there. If you have to sell, then you might lose, but if you stick it out, then the worst thing is you will get your investment back with a small return.

My recommendation to clients these days is to remember that rates can go up overnight and may never come back, or they could improve slightly. In other words, if you can get a historically low rate already, you might save $20 per month if you wait knowing you might well end up paying $25 a month more if you lock today and things do improve. Everybody wants to have the cheapest mortgage on the block, but in the long run, you’re never going to feel too bad about having a mortgage at today’s rates.

Chris Neuswanger is a loan originator at Macro Financial Group in Avon and may be reached at 970-748-0342. His blog and a collection of his columns may be found at http://www.mtnmortgageguy.com.