You may or may not have heard that the Federal Reserve is raising interest rates again. Last year, after almost a decade of 0 interest, they decided that the economy was strong enough to budge rates up a little bit. Now they’re raising rates for the third time and it’s starting to look like a trend. Rising rates will affect almost everything in finance one way or another, but one of the more noticeable changes will be on home mortgage interest rates.
Fed Interest Rates and Home Mortgage Rates
The Federal Reserve (to be referred to as the ‘Fed’ from now on to preserve my keyboard) interest rates are not the same as Mortgage interest rates. Which is why home-buyers weren’t getting 0% mortgages over the last 8 years. Basically the Fed interest rate is what it costs regular banks to borrow money or keep money on hand. Essentially it’s a big part of their cost basis.
The home mortgage rate that your bank offers is marked up and factors in the current Fed rates, anticipated Fed moves, bond rates, and how much secondary investors are willing to pay for mortgages (your bank likely sells your mortgage off soon after you sign the dotted line). So in the short-term, while current Fed rates definitely influence mortgage rates, the two are not directly linked. Which is why over the 8 years that Fed rates were 0%, mortgage rates still fluctuated a little. However, since everything else financial is also related in one way or another to the Fed’s moves, when the Fed moves interest rates, mortgage rates will follow. They’ve already gone up a little since their rock bottom lows. And assuming the Fed continues its current trajectory, which they have indicated that they will, mortgage rates will continue to rise over the next few years.
What Do Rising Mortgage Rates Mean For Me?
Depending on what your living situation is, mortgage rates may or may not really affect you that much. If you’re living in your parents’ basement and have no intention of moving, thank your parents again (as they re-watch Failure to Launch for the hundredth time). Mortgage rates do not affect you.
If you bought a house with a fixed mortgage (most common), your rate is locked in. However, you can choose to refinance your home. Essentially you take out a new mortgage at current rates and toss out the last mortgage.
If you bought a house with an Adjustable Rate Mortgage (ARM), your interest rates are tied to the market rates. Your rates and payments will likely go up in the near future, if they haven’t already done so.
If you are renting, mortgage rates will not have an immediate impact on you. However, when mortgage rates are high, home sales slow down, meaning there’s more renter demand and landlords are able to charge more in rent. If your particular landlord sees rates going up around you, he may just raise rent just for new tenants. Or he may raise rates across the board. This uncertainty is one of the downsides of renting. However, don’t rush into a home purchase on this account alone- there are advantages to renting as well.
Should I Refinance?
If you are sitting on a fixed mortgage with a low rate (4% or less) that you locked in over the past decade, you’re golden. You are fully shielded from rising rates.
If you are sitting on a mortgage from 2009 or before, you could easily have an interest rate of 6% or above. In your case, you’re looking at a quickly closing opportunity to refinance your mortgage for a lower rate. However, be aware that refinancing will cost you in closing fees, so refinancing only saves you money if it saves you more in interest than it costs you in closing fees. You can figure this out on your own using a mortgage calculator to compare your current mortgage to a new mortgage. A mortgage loan officer can also break down the differences, although be aware of where their interests (pun?) lie. A good mortgage lender will honestly tell you when refinancing doesn’t make sense. But a less-than-ethical one might push you into a refinance anyway to boost his bonuses.
Also, be aware of lengthening your loan. If you have 20 years left on a 30 year mortgage, and refinance for another 30 year mortgage, you may indeed be scoring a lower monthly payment (and a loan officer may use this to sell you the mortgage). But you’re also adding 10 years to your mortgage repayment, and potentially costing yourself much more in interest.
If you are sitting on an adjustable rate mortgage, you’re probably realizing the benefits of a fixed rate mortgage. Let a few choice words fly for the loan officer that sold you the ARM. Since no one knows how much interest rates will go up, your next move is not an easy one. Since refinancing comes with a fee, you could potentially lose money by refinancing, just to see interest rates stall out. On the other hand, if you don’t refinance, interest rates could go back up to 8%, adding hundreds to your monthly payment and thousands to your total interest costs. Your best move at this point might be to hustle up and start making extra payments on your loan to minimize your interest payments and knock that mortgage out of the park.
What if I’m In the Home Buying Process?
If you are currently looking for a home to buy, your initial reaction to rising mortgage rates is to hurry up and buy a home to lock in your mortgage rate now. This is a logical reaction. There’s no sense in dragging your feet for no reason. However, don’t rush into a home purchase that you’ll later regret. Your interest rate is not the only factor or expense in home ownership. Make sure you’re still getting a home that fits in your budget and isn’t too big (or small). Still be aware of potential repairs and other costs. And be aware that you are not the only home buyer that’s having a sudden urge to buy now. Meaning that there will likely be a flurry of home offers that will decrease your chances of getting a good deal on a home.
Keep Rising Rates in Perspective
Rising rates are important, but they aren’t the financial apocalypse. Although if they go back up to 14%, maybe they are the financial apocalypse. Then again the 80s survived double digit rates, so perhaps we can too. The bottom line is that rising rates are just a part of the natural rhythm of our financial system. It’s good to be aware of them. But don’t buy into the hype that certain media outlets are giving them. Life will go on, even with 8% mortgage rates.
While I do strive to only write accurate information and dispense valuable advice, I am not a licensed financial adviser. All information is based solely on my personal experience and personal research and should be treated as such. Find out more.