How the Federal Reserve's "Tapering" could affect Interest Rates

What does Tapering mean to you?

Federal Reserve Chairman Jerome Powell said after the Fed meeting in Sept, the central bank will likely begin tapering their economic stimulus this year as the economy continues to recover from the COVID-19 pandemic. Tapering means the process of slowly pulling back the stimulus they’ve provided during the pandemic. For most of the past year and a half, the Federal Reserve has been buying at least $120 billion of Trea­sury and mort­gage se­cu­ri­ties each month. These purchases have helped keep interest rates low and provided support to the markets that malfunctioned terribly at the start of the pandemic crisis. 

What happens when Tapering begins?

Watch the Federal Reserve announcement on tapering at its November 3rd, or December 15th meeting. The Fed will begin buying fewer bonds and put less money into the economy. Once the tapering begins, interest rates should not increase immediately as some financial experts still predict rate increases to be one year off. However, as the pandemic taught us, nothing is certain. Also, watch when the Federal Reserve raises the federal funds rate as that will be another sign of future interest rate increases. 

When will Interest Rates rise?

That's the answer no one can answer with any certainty. When the economy slowed down in 2020, the Federal Reserve dropped the federal funds rate to 0% to help stabilize the economy. Currently, the Federal Reserve members are split on whether to enact the first quarter-point hike in mid to late 2022. The Fed officials could see as many as three more interest rate hikes in 2023 and three hikes in 2024, which would bring the Fed’s benchmark borrowing rate to a range between 1.75% and 2%, considerably higher than the current 0.00% to 0.25%. This interest rate increase could affect everything from multifamily mortgages, home mortgages, student loans, personal loans and even credit cards.

As Interest Rates Rise, Your Cash Flow decreases.

Your current multifamily interest rate may be lower now than the current rates, and you also may have a prepayment penalty that's holding you from refinancing. However, you really need to check all of your loan maturity dates to see when your prepayment penalties expire, so you can refinance sooner. Howell Investment Finance has seen several investment properties where it makes sense to pay off the prepayment penalty and lock in an interest rate for the long term. This is advisable when the sponsor feels the interest rate will be higher by waiting for the loan to mature. The prepayment penalty amount can be included in the new mortgage, so you don't need to pay for it out of your operating or reserve accounts. The unknown question is how high will your interest rate be should you wait for your loans to mature vs where they are currently. By refinancing now, you can lock in your interest rate for the next 10 years to 35 years and keep your positive cash flow. Howell Investment Finance can also assist you to see if securing a slightly higher interest rate now makes sense and how long it takes to recapture the loan costs. 

When you need financing for your multifamily, mixed-use, and senior housing properties, Howell Investment Finance will help simplify the process. Howell Investment Finance finances throughout Iowa, from Cedar Rapids to Iowa City to the Quad Cities to Des Moines, to Ames, to Sioux City. They offer a variety of financing options, including HUD, Fannie Mae, Freddie Mac, and construction loans. Visit their website to learn more about their program options. Call (515) 233-8228 to get started today.