If you’ve ever looked into getting any sort of loan for a mortgage or home improvement project you’ve probably heard talk about the Federal Reserve rate and how you may want to wait or move at a specific moment. But what does all this really mean? How can some big government institution like the Federal Reserve actually affect the rate of a home remodeling loan that you might apply for?
The Federal Reserve Board is government organization which does a number of important things, but one of the most high-profile monetary tasks of the Federal Reserve is to, in it’s words:
Open market operations–purchases and sales of U.S. Treasury and federal agency securities–are the Federal Reserve’s principal tool for implementing monetary policy… The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight.
Essentially, the Federal Reserve controls the rate at which banks and other lending institutions can borrow money themselves. Banks and other financial institutions that lend money for mortgages, home equity, and home improvement loans can then adjust the loans they sell up or down so that they can still make money.
Here’s an over-simplified example: if a bank can borrow $10,000 at 4.00% interest then they might be willing to offer you a $10,000 loan for a home remodel at 6.00% interest. As you repay the loan at 6.00% the bank would take the extra you paid, keep it as profit, and pay back the 4.00% on the loan. Essentially, the bank you borrowed money from is like a retail store with money: it “buys” money at 4.00% and it sells it to you at 6.00%.
This means that when the Federal Reserve rate is low you, as a home owning consumer, usually get better mortgage, home equity and home improvement loan rates. Of course, banks also have to worry about other things like loan default rates, paying employees, other market investments it may have and a variety of other things, so the rate at which they offer a home remodeling loan may fluctuate a fair bit from one day to the next.
Generally, when the Federal Reserve Board lowers rates most consumer loan rates, including home equity and home improvement loan rates, drop down a little bit. Likewise, when the Federal Reserve Board raises rates, loan rates go up.
Right now the Federal Reserve rate is at a historic low, which is just one of the many reasons why it’s a good time to get a home improvement loan.
It’s also important to note that the change in rates is not always immediate. Most experts in the financial industry say that it takes at least a week or two for banks to begin properly adjusting their rates and gauging market conditions before you may see the rates on things like mortgages and home improvement loans go up or down.
Obviously, your credit score, income and current home value will also play a part in whether or not you can get a good rate on a home improvement loan. The best way to find out more is to use a free home improvement loan calculator that can give you all the rates and details that apply to your specific financial circumstances.