Three Ways The FOMC Effects Home Equity Loans

[Jul 3, 2009.]

 

What is the FOMC?

FOMC stands for Federal Open Market Committee.  It is the Federal Reserve's committee for setting monetary policy in the U.S. Their website is http://www.federalreserve.gov/monetarypolicy/fomc.htm

How To Figure The Note Rate For Your Home Equity Loan

Many Home Equity Loans are adjustable rate mortgages. The note rate on an adjustable rate mortgage is made up of an index and a margin.  For example: most home equity loans are tied to the Prime Rate plus a margin. The current Wall Street Journal Prime Rate is 3.25%.  If you add a margin, in this example .500%, the monthly payment would be based on a note rate of 3.75%. 

#1 The FOMC Effects Home Equity Loans Using The Fed Funds Target Rate

One key method for effecting U.S. monetary policy is the Fed Funds Target Rate.  The monthly payment on your home equity loan most likely fluctuates based on the Prime Rate and a margin.  The Prime Rate may be higher or lower depending on what the FOMC is doing with the Fed Funds Target Rate.  The interest rate on your home equity loan, and therefore the monthly payment, could go higher in the future if the FOMC changes the Fed Funds Target Rate. Read this previously written article to familiarize yourself with the relationship between the Fed Funds Target Rate and the Prime Rate.

#2 U.S. Monetary Policy Effects Your Home Equity Loan

As stated above, the FOMC is the Federal Reserve's committee for setting U.S. monetary policy.  If that policy is set "loose," the government is trying to stimulate the economy.  If the monetary policy is set "tight," the governement is trying to control growth and deal with inflationary pressures.  The note rate on your home equity loan most likely tracks the Prime Rate, which is related to the Fed Funds Target Rate, which is one of the primary tools the Federal Reserve uses to set U.S. monetary policy. 

#3 Current FOMC View On Inflation

According to their most recent press release, the FOMC believes that "inflation will remain subdued for some time."  Read the press release. The longer that the FOMC maintains a low Fed Funds Target Rate, the more risk there is of inflation in the future.  Once inflation becomes more of a problem than the current economic contraction, the FOMC will begin raising the Fed Funds Target Rate.  This will ultimately mean higher note rates and monthly payments on your home equity loan.

Read more on U.S. Monetary Policy and Inflation here.

 

About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.