What the Fed's Move Will Mean for Mortgage Rates

With the Federal Reserve finally expected to hike interest rates, your first thought might be what that means for mortgages.

You're right to be concerned—for millions of Americans, taking on a mortgage may be the largest financial decision they ever make. If and when the Fed makes its move, homeowners will face higher rates, affecting both the cost of borrowing and the price of homes across the country. But don't get bent out of shape: the impending increase doesn't mean you need to rush to buy or sell a house.

Today, borrowers taking out a 30-year mortgage, by far the most popular option, pay an average of 3.9%, near record lows. At that rate, the monthly payment on a $200,000 mortgage would be $944. (To see what you would pay on a different amount, try our Mortgage calculator). For comparison, at 6%—where 30-year mortgages hovered before the Fed started cutting interest rates in 2007—that same loan would cost $1,200 a month.

Low rates have helped the housing market in other ways. After all, the less you pay to borrow, the more you can can afford to spend, so cheap money has enabled home prices—up 4.5% this year—to climb at a steady pace.

With the Fed now raising rates, there's a fear that dynamic could reverse. But while a change in the Fed's attitude is certainly noteworthy, the Fed's actual initial move is likely to be relatively small—perhaps a change of one quarter of a point. If mortgage rates rose by that amount, from 3.91% to 4.16%, that same $944 monthly payment would only jump about $30, to $973.

Of course, the Federal Reserve is likely to continue raising rates as long as the economy improves. So mortgage rates may be set to rise a lot further. But that process is likely to take years. After the dot-com recession it took the Fed three years to raise the funds rate from the then low of 1% to 5.25%, where it sat on the eve of the financial crisis. Given the continued weakness of the economy the Fed might act even slower this time around.

There's also another big reason to take any rate increase with a grain of salt. There is no guarantee a relatively small interest rate hike by the Fed will actually lead to a bump in the mortgage rates most borrowers pay at all. Keep in mind that while pundits often talk about the Federal Reserve controlling interest rates, what the Fed most closely influences is short-term interest rates. Interest rates borrowers pay for 30-year mortgages reflect longer-term rates, typically the rate of the 10-year Treasury bond, since a decade more or less reflects how long typical homeowners keep their mortgages. (Other products like one-year adjustable-rate mortgages more closely track short-term rates but account for a far smaller share of the mortgage market.)

While short-term interest rates certainly do affect the market for 10-year Treasury bonds, they are far from the only factor. Another big one: Investors' appetite for risky assets. This fall, worries about economic turmoil in China and Europe sent 10-year Treasury prices up—and interest rates down—despite the fact many investors thought the Fed would raise rates in September. In other words, market forces can push mortgage rates around regardless of what the Fed does. Indeed, since the start of 2014, 30-year mortgage rates have floated as high as high as 4.43% and as low as 3.67% without the Fed moving short-term interest rates in either direction.

All this doesn't mean the Fed isn't worth paying attention to. But don't run out and call your realtor.

Read next: What Does the Federal Reserve Do Exactly?