Interest Rate Are Up – What Does That Mean To You?

18 Jan

Interest Rate Are Up – What Does That Mean To You?

By Doug Goelz, Mortgage Services

Interest rates rose the day after the Presidential Election. The initial increase was due to uncertainty about the new Administration’s policies and their impact on the economy. Then, in December, the Fed raised the Fed discount rate and signaled that they may raise the Fed rate as many as three times in 2017. In addition, some economic reports published in December indicated a strengthening economy and the likelihood of more inflation than we have seen in years. The Fed’s decision to raise their rate and the indicators of a stronger economy provided reasons for mortgage rates to rise that were more substantive than the speculation right after the election.

Towards the end of December, and in the beginning of the new year, mortgage rates have settled down a little, but it is likely that rates for most new mortgages now are about .5% higher than they were at the beginning of November. While we have not seen rates this high for years, they are still very low by historical standards.

What does a .5% increase in interest rates mean to you? For every $100,000 in mortgage, an increase in the rate from 3.5% to 4.0% costs about $28 more per month. A borrower needs to make about $4800 more per year to qualify for a $600,000 mortgage at the higher rate. In addition, some credit card rates are tied to the Prime Rate (which moves in lockstep with the Fed rate), so credit card payments may have increased, which could further erode the purchasing power of borrowers. For borrowers who need to maximize their borrowing power, certain adjustable rate mortgages (ARMs), which have initial rates lower than rates for 30 year fixed rate loans, might be a good option so that the interest rate is lower, and payments on larger loan amounts more affordable, at the beginning of the loan.

Will mortgage interest rate continue to rise? Probably so, IF the economy continues to seem to be getting stronger AND the Fed raises their rate. However, if the economy stalls, AND/OR world events make the United States a more attractive place for investors to move their money, rates could stay the same or even drop.

Should you wait to buy and see if rates will drop? I always counsel against trying to time interest rates: there are too many unknowns for anyone to be able to forecast rates with any certainty. The time to buy is when you can afford it and you find a property you like. There is a reasonable likelihood that rates will be higher in June 2017 than now. However, if you buy soon, and rates drop in the future, refinancing may be an option.

Questions? Feel free to get in touch with me at 415-730-4665 or doug@emortgageservices.net