Fed may raise interest rates

If you’ve been waiting for the Federal Reserve to lower interest rates again before you apply for a new home loan, you may want to rethink your strategy.

Many financial analysts now believe the Fed is unlikely to lower rates again this year and may even raise rates before the year is over.

The Fed doesn’t directly control interest rates on mortgages, home equity loans, auto loans or other types of credit. But the Fed’s actions affect the interest rates that banks pay and that indirectly affects the direction of consumer interest rates.

If you’re shopping for a mortgage to buy a home or refinance an existing loan or if you’re looking for a home equity loan, you should be aware that interest rates can fluctuate regardless of whether the Fed takes further action or not. If you wait for lower rates, you may be rewarded by lower monthly payments. But if rates increase, your payments could be substantially higher and you may not be able to borrow as much money as you’d wanted to. If you’re shopping for a home, the cost of higher interest rates could even offset the savings of lower home prices.

The Fed has already lowered bank interest rates seven times since late last year to try to hold off an economic recession in the U.S. But Fed Chairman Ben Bernanke recently said there is now less risk that the economy has entered a substantial downturn.

He also said the Fed will pay close attention to inflationary pressures and expectations in the financial markets. That suggests the Fed is less likely to lower bank interest rates further, even though the housing sector is still weak. The Fed is especially concerned that too-low interest rates could trigger an upward spiral of out-of-control inflation.

Of course, no one can predict interest rates with certainty. That means borrowers shouldn’t make important financial decisions on the basis of interest rate forecasts that may not be reliable. Consider your own personal situation. If it makes sense for you to get a new loan today, you might not want to delay in hopes of lower interest rates that might not materialize any time soon.

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