Best Rates

Rail passengers like trains that go fast, because they get to their destinations quicker. But a train that goes too fast runs the risk of derailing. So it is with the economy. It is possible to have too much of a good thing, and there are some circumstances under which the Federal Reserve Board will “put on the brakes” with regard to the economy by raising interest rates.

The Federal Reserve Board’s goal, or at least one of them, is to manipulate the economy in such a way that runaway inflation is avoided. The Fed does this by raising the interest rate when inflation becomes an imminent threat.

How much are rates likely to go up over the space of a year? Putting on the brakes too quickly can be damaging too, and accordingly, the Fed, when it realizes that interest rates must rise, does so in modest increments, usually no more than a quarter to a half percent at a time.

The greatest increase in recent history was in 1994, when the rates were increased by the Fed a total of six times during the year, moving from 3.25 percent to 5.5 percent. In general, interest rates are not likely to rise more than two and a half percent over a year’s time. Still, a two and a half percent difference means a lot of money.

A $100,000 30-year mortgage at six percent would carry payments of $599.55, where an equivalent mortgage at 8.5 percent would have payments of $768.91, a difference of $169.36. That big of a difference can mean the difference between being able to afford payments on a new home, or having to put off buying a home until later in their lives.