The Federal Open Market Committee has consistently raised the interest rate charged among financial institutions this last year.Here’s a look at how impending increases could affect you as an investor.On the home frontFirst, mortgage rates will likely rise with target interest rates, possibly cooling the nationwide housing boom that has helped sustain the economic recovery. Rates on home loans are tied to the yield on U.S. Treasury’s. Thirty-year fixed-rate mortgages typically follow the 10-year Treasury note; whereas, adjustable-rate mortgages may be tied to two, three or five-year Treasury’s. Generally, Treasury’s with shorter maturities react more quickly and dramatically to changes made by the Federal Reserve.To give you an idea of how higher mortgage rates might affect home-buyers, consider an individual who applies for a $200,000 mortgage loan from a lender that charges a margin of 2 percent above the 10-year Treasury. If the loan were made at a time when 10-year Treasury’s were yielding 4 percent, the individual would be charged 6 percent interest for a monthly payment of roughly $1,199. If the loan were made after the 10-year Treasury had risen to 5 percent, the individual would be charged 7 percent interest for a monthly payment close to $1,330. That’s a difference of about $130 per month or $9,360 over a six-year period, which, according to an article on the Wall Street Journal in February 2004, is the average length of time that homeowners stay in a property.Issues for bond ownersBond values also are affected by higher interest rates. The price of bonds sold on the open market generally moves in the opposite direction of interest rates. In other words, when interest rates rise the price of outstanding bonds usually falls because bonds purchased yesterday at 5 percent are worth less to prospective buyers if bonds available today offer 6 percent.Interest-rate fluctuations only affect investors who decide to sell their bonds before they reach maturity. However, if you own bonds that are set to mature and you are considering reinvesting the money in new bonds at current rates, you may want o diversify your investment or set up a bond ladder to reduce your exposure to historically low yields. The principal value of bonds may fluctuate due to market conditions. If redeemed prior to maturity, bonds may be worth more or less than their original cost.Market reactionStockholders should be aware that the financial markets may react unfavorably to interest-rate increases, although the adjustment is often temporary and may be factored into stock prices before the rate change actually occurs. The return and principal value of stocks fluctuates with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.Although the Federal Reserve maintains that it can be “patient” about raising interest rates, determining exactly how long its accommodative policy will last is anybody’s guess. As the economy improves, it may be wise to keep an eye on the Federal Open Market Committee, whose meeting dates and policy statements can be found at http://www.federalreserve.gov/fomc.Please have a safe series of holidays in the coming weeks.Donnell Services, LLC719-886-3377Registered RepresentativeSecurities America, Inc.Member NASD, SIPCFor more information, visit www.alexdonnell1.sarep.comDonnell Services, LLC and Securities America, Inc. are independent companies.
