With the US economy slowly gaining momentum, the Federal Reserve has begun the process of raising interest rates. Over the past 5+ years, home buyers have been operating in an environment where rates were dropping on a continual basis. For those who could afford to do so, many home buyers were simply putting off purchasing homes until they felt rates were nearing a bottom. Now that the Fed has increased the Fed Funds rate by .25%, mortgage rates are going to start climbing, be it slow and methodical.
Where Mortgage Rates Might Go in the Near Future
Now that the Fed has signaled its intention to closely monitor the economic landscape in the coming months, consumers can expect to see rate increases whenever the economy shows significant improvement. With unemployment down below 5% and personal income on the rise, the primary concern is inflation. Based on the current information from the experts, the best guesses about where interest rates will be going over the next year range from four more rate increases in 2016 all the way down to no change by the end of the year. With that said, it’s safe to say that any upward movement in rates over the next year will most likely be moderate, perhaps 1% in total.
How Mortgage Rates Are Expected to Move in Conjunction With the Fed Funds Rate
For home buyers who entered the real estate market for the first time during the last six years, there will need to be a significant change in mindset as interest rates reverse recent trends and start heading up. For the most part, mortgage rates can be expected to increase by the same amount as the Fed Funds rate. At the top end of recent estimates, homeowners and future home buyers can assume mortgage interest rates will settle at around 4.6% for a 20-year fixed by the end of the year.
Mortgage Strategies to Use When Mortgage Rates are Trending Upwards
Assuming mortgage interest rates could be as much as 1% higher by the end of 2016, consumers need to think seriously about how they want to handle their current situation. By dividing consumers into two groups (current borrowers and future borrowers), specific strategies can be employed to help folks save money.
Here are a few strategies current borrowers can use in the coming months to improve their current mortgage situation or protect themselves from future issues.
1. Refinancing Current High Fixed-Rate Loans – For current borrowers who are carrying mortgages with interest rates higher than 5%, the time to try to refinance is now. By the time rates hit the 4% range, the benefits of locking in a lower rate could be offset by loan fees, making it an exercise in futility. With rates currently in the mid 3% range, there is still enough meat left on the bone to make refinancing worth the effort.
2. Refinancing ARM Mortgages – For current borrowers who have an ARM mortgage, now would be a great time to think about trying to refinance into a fixed-rate mortgage. As the likelihood of mortgage rates increasing in the coming years becomes more of a reality, the coming months might be the last time in the next decade to lock in a mortgage rate below 4%. It doesn’t make sense for borrowers to wait around while their monthly payments go up every 3-6 months. Those who have been trying to time the market should be making a move now.
Here are a few strategies that should be employed by future borrowers as they make a move into an improving housing market.
1. No time Like Now to Buy a Home – For home buyers who have been sitting on the sidelines waiting for the right time to buy their first home or for those who have been seeking an opportunity to move up into a bigger home, now is the time to buy. First, home prices are likely to start increasing as the economy continues gaining momentum. If home buyers miss out on the opportunity to lock in a mortgage rate at today’s levels while home prices are still affordable, they may find themselves having a difficult time qualifying as everything trends upward.
2. Focus on Fixed Rate Loans Only – It goes without saying that the popular ARM packages offered over the last 4-5 years should be falling out of favor. Prudent home buyers will want to focus on fixed rate mortgages for now and into the foreseeable future. If the opportunity to buy down an interest rate even further presents itself, it might be a good idea to do so if at all possible.
For the time being, the real estate market is going to favor those who act in a conservative manner. For prudent consumers who take the right actions now, the savings they might reap over the coming years could make them seem geniuses. That’s a sight better than living with the regret of waiting too long to act.