The newscaster reports, “The Federal Reserve has raised the discount rate another .25% and experts expect another two increases this year,” leaving you wondering what this means to you. If you’re thinking about buying a new home, it means a lot to you because mortgage interest rates will likely also rise.
The good news about rate increases is that they usually result from optimism about the economy. The bad news is that increased rates mean it’s becoming more expensive to buy things on credit, especially your home.
If you’re looking into a new mortgage, rising interest rates may prompt you to ask many questions.
- Should you buy a new house now or wait for rates to fall?
- Should you choose a mortgage with an adjustable rate that rises when rates go up and fall as rates decline?
- Should you get a fixed-rate mortgage?
Without the ability to see the future, the answers to these questions can be tricky. Read on, and we’ll provide more information that may help you decide what you should do.
What can you expect in the near future?
Most experts expect that interest rates, and mortgage rates included, will continue to rise over the next year or more. As long as the economy remains strong, the Federal Reserve will likely raise rates periodically. Why? When the economy is humming along, the potential for inflation increases. Investors seek higher returns on investments, including those investing in making mortgages to consumers.
The Fed is also trying to stabilize inflation. Inflation is an economic condition characterized by rising prices. As consumers have more money to spend and more demand for goods and services, the suppliers of those goods and services can charge more in most cases. The Federal Reserve will raise rates to try to stabilize the economy and head off any spike in prices that can lead to a recession.
What do mortgage rates look like now compared to the past?
As of August 1st, 2018, mortgage rates for a 30-year fixed rate loan were hovering between 4.5% and 5% with no expectation for a drop anytime soon. That’s up a full percent from the rates one year prior.
Keep your thoughts in a historical perspective is essential. Mortgage rates had been historically low for nearly the whole last decade. Compare today’s rates to the average borrowing costs from the year 2000 to 2010 which ranged between 5.5% and 8.5%. In the 90s, the 30-year home loan rate hovered steadily between 6.5% and 9.5% during times of a generally healthy economy. While interest rates have been rising, they are still low.
If you're a homeowner, you may want to act now.
If you own your home, it doesn’t mean rising rates are of no concern. You may have an adjustable rate loan. If so, now could be the right time to lock in your rate before they go up more.
If you have been holding off on refinancing from a higher rate, it may not be wise to continue waiting for a lower rate. Now could the time to refinance your existing mortgage.
What should you do if you’re shopping for a house?
If you’re currently shopping, you probably already know that house prices are rising. It’s a seller’s market right now. According to the National Association of Realtors, the average price tag for a home is now $264,800, up by almost 100K from 2011. With the sales price of a new home likely to stay high, it will be important to make sure you don't pay more for your mortgage than you have to.
The first thing you should do when considering a home purchase is shop around before choosing a mortgage. Get as many quotes as you can, do your research, and make some more phone calls. The work will pay off in the long run.
Another tip is to consider an adjustable rate mortgage. It may seem illogical to consider a loan that may become more costly if rates rise, but don’t immediately jump to that conclusion. Many adjustable-rate options lock in your rate for a specified amount of time, frequently as long as seven years. The starting rate for this type of loan will often be lower than the long-term fixed rate option. The savings over the initial period can provide a good cushion for any rate increase that comes later. Also, if you don’t plan to stay in the home longer than the initial period, you’re savings can help you have a more substantial down payment for your next purchase.
In the end, it’s not worth fretting over rising mortgage rates, but it is worth monitoring them and taking your time to research your options before jumping into a long-term home loan.
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