If you are in the market to buy a house or are considering whether to refinance down an existing home mortgage with the Fed rate hikes on the horizon, consider the following.
Now would be the time to tune-in, buckle-down and get educated on all the complex interest rate and home-lending financial jargon in the news, as things are about to become a bit heated on main-street for homeowners.
You may end up saving yourself a thousand dollars a year or more in debt payments if you take action in the next year and not procrastinate. The days of “easy-money” will soon come to an end.
We believe that the Fed may start slowly raising rates in November by about a quarter point per quarter, similar to the 16 hikes we experienced during the dot-com market recovery period started under Fed Chair Greenspan. The Mortgage Bankers’ Association predicts that mortgage interest rates will rise to 5% by the end of 2015, which is up 1.25% from today’s 3.75% 30 Year Fixed loan amount. Just remember that is only a prediction.
Mortgage rates are very sensitive to economic reports and supply and demand, just like stocks and bonds. For this reason, jobs reports, consumer price Index, home sales, consumer confidence, and other data can affect mortgage rate values over time.
The main benchmark for the 30 years fixed mortgage rate movement is the 10 Year Treasury, which also is utilized to track long-term bond rates for investors. The difference between the 10 Year Treasury and a 30 Year mortgage rate is about 1.7%. For example, if today the 10 Year Treasury is 2%, a 30-year mortgage rate should be about 3.7%.
When the Fed starts to hike interest rates, they are raising the intra-bank lending rate- which is known as the Fed-Funds rate. This is the rate at which a depository institution or bank lends funds maintained at the Federal Reserve to one another overnight. As the Fed controls short-term rates and the market controls long-term rates, there is no direct correlation to know how much, if any, long-term rates will go up.
The trajectory of Fed rate hikes remains very slow over the course of the next few years. We believe that the effect on long-term interest rates as well as on long-term mortgage rates, will be muted for this year of about a half point increase by next spring, but could easily tack on a few points by the end of 2017 up to 6% or more for a 30 year fixed mortgage.
Right now, the whole world is supported by a “zero rate” policy and the 10-year yield has actually been falling over the past year. The reason? When Europe’s economy is vacillating, investors around the world look for safety in the Treasury market, buying U.S. government bonds and pushing yields down.
Another factor to consider is that the Fed is holding trillions of dollars of Treasury’s following a huge bond-buying program that ended last year. So as you can see, there is a lot to do with supply and demand when it comes to rates pressures more so than the short-term rate hikes themselves.
Bottom line is that when the Fed begins raising rates we may eventually see long-term rates go up which is great for investors but painful for borrowers. Even if the mortgage rates a year from now hit 4.75% to 5%, rates will still be well below the 8.5% 30-year fixed rate mortgage average since 1971, when Freddie Mac started tracking them.
For more information on our firm or to get in touch with Jon, please email [email protected] or visit us at www.ulinwealth.com today.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.