Potential homeowners have taken notice: mortgage interest rates are on the rise. While some borrowers don’t think of quarter-percent rate hikes as being good or bad (and, frankly, it’s my opinion that it’s neither), it is probably not a bad idea to take a few minutes to learn exactly what this means for your home mortgage, and what you can do to combat these rising mortgage interest rates
First, some quick background.
The Federal Reserve sets the benchmark federal funds rate. The “Fed” (shorthand) is the Federal Reserve Bank, the agency charged with setting monetary policy, and control the physical supply of money in the United States. Each quarter, a group of Federal bank executives get together to decide if they are going to raise interest rates.
Why raise interest rates? The benchmark Federal funds rate is the rate at which most consumer loans is based on. In larger context, by keeping the Fed rate low, you can stimulate borrowing and the flow of money, which is exactly what the Feds did to address the recession that followed the 2008 housing bubble bust.
But, alas, interest rates cannot remain low forever. That can lead to an over-heated economy, and the dreaded enemy of the Feds, inflation. To keep an even keel, the Feds have quietly raised the benchmark rate a little bit at a time since 2014. At the most recent March 2018 meeting of the Federal Open Market Committee, the group of Feds that actually make these decisions, they voted to raise the rate by 0.25% – a significant hike.
Your mortgage rates will increase
For you, the mortgage borrower, this will have the effect of raising your interest rates on your mortgage, if you didn’t lock your rate prior to that March meeting. If you locked in a rate prior to March 21st, 2018, consider yourself fortunate!
Also, it should be noted, if you are already in a fixed-rate mortgage, you have nothing to worry about. That’s the magic of fixed-rate loans. The rate doesn’t change with the market; it’s “fixed”.
For our clients who are currently shopping for homes and haven’t locked in a mortgage yet, you will see your previously quoted interest rate suddenly jump, the degree to which is wholly based on your credit. The most credit-worthy borrowers probably won’t see much difference – maybe an eighth of a percent or so.
Over the life of your loan, a quarter to half-percent interest rate hike will add a few thousands dollars in interest to your payoff. But, it will not have an obvious impact on your monthly payment, if any at all.
Going forward, the FOMC has hinted that they intend to continue raising interest rates over the next few years. Industry insiders are predicting mortgage interest rates will rise to around five percent in two to three years, which, historically speaking, is actually a more “normal” rate than what we’ve been seeing these last few years.
What you can do about mortgage interest rate hikes
There’s nothing you can do to stop interest rates from rising, but here are a few things you might be able to do to cope with the hikes:
Work with a mortgage broker. Mortgage brokers exist to help you shop a wide variety of loans, terms, and lenders to match your unique financial circumstances and goals. We’ve talked at length about the benefits of hiring a mortgage broker in the past. But, now more than ever, it’s crucial that you at least shop mortgages with a broker.
Talk to more than one mortgage broker. You don’t marry the first person you meet, do you? Of course not. So, unless you are smitten with that broker, you don’t have to hire the first mortgage broker you meet. In fact, we provide every one of our homebuyer clients with a short list of brokers we trust for this very reason. Call them all. Let each of them find the best rate and the best terms they can, compare them, and make a decision on who to go with.
Increase your credit-worthiness. Yes, interest rates are going to rise, and yes, it’s going to affect the rate at which you can borrow money for everything in life – cars, students loans, consumer credit cards, personal loans, and most definitely mortgages. But, as always, the better your credit, the lower your interest rate. Increase your credit score by paying down credit cards. You could also work with a credit repair specialist, who for a reasonable fee, will fight to get poor credit reporting removed from your credit profile. (Talk to us for a referral!)
Explore unconventional loan terms. I’m a big fan of this. Today, there are dozens and dozens of mortgage products available to suit your needs, with varying terms. You can get a 15-year, 20-year, or 25-year loan instead of a conventional 30-year loan. You’ll pay a little more each month, but it could save you tens of thousands of dollars in interest over the life of the loan.
A 25-year loan at 5.25% interest rate will cost you, over the life of the loan, about the same or less in interest than a 30-year loan at 4.25%. Why? It has to do with the length of the loan. The longer the loan term, the more time you will be paying interest.
In short: if mortgage interest rates rise, combat it with shorter loan periods.