Is the Federal Reserve hinting that higher mortgage rates lie ahead? In mortgage news this week, there are a number of leading publications which report that steeper interest rates may be in our future. For instance:
- Fed Puts Interest-Rate Hikes in Play, The Wall Street Journal.
- Federal Reserve decision: Fed signals that higher interest rates are coming, The Washington Post.
- Fed sees economy moderating but takes step toward higher interest rates, LA Times.
"The Federal Reserve isn't going to be 'patient' anymore," says The Guardian. "Dropping that one word from the language surrounding policymakers' approach to future interest rate hikes may seem minor, but it's a significant change for savers, investors and borrowers."
While not everyone agrees with such forecasts, it's a fact that the Fed has not raised short-term rates for nearly seven years. It's also a fact that although there has been a lot of chatter about when rates will rise, nobody knows for sure what the Fed will do or if it will do anything. Lastly, it's hard to ignore that as soon as the Fed released its March economic analysis mortgage rates had a sharp, one-day decline and that as of this writing they have stayed down, meaning there's an interesting window-of-opportunity for those who now want to finance and refinance.
Mortgage News: Uncertainty
For homeowners the mixed signals from the Fed suggest that now may be a very good time to check out mortgage refinance options. The central reason concerns an absence of certainty: if the Fed does not raise rates, it's okay; however, if the Fed pushes costs higher, it would be a shame to have missed today's opportunity to save.
According to The New York Times, "the forecasts published by the Fed showed that 15 of the 17 members of the policy-making committee expect to raise the Fed's benchmark rate this year. Those projections showed that on average they expect two increases, to roughly 0.75 percent. The Fed has held short-term rates near zero since December 2008."
$1,000 a Year?
Imagine that you want to refinance today. Fannie Mae reports that the typical 30-year, fixed-rate conforming mortgage is now priced at 3.78 percent costing .6 points. If you borrow $200,000 today, your monthly cost for principal and interest will be $929.64.
Raise the rate by .5 percent to 4.26 percent and monthly costs grow to $985.05 – that's an extra $55.41 per month or $665 per year.
If the rate increases by .75 percent to 4.53 percent? The new monthly payment will be $1,016.94. That's an additional $87.30 a month or $1,048 per year.
The ability to save an extra $55 or $87 a month becomes especially important when you look at the economy. For many households, the dream of a better lifestyle has been tough to maintain. Pew research shows that between 2000 and 2013, the percentage of households in the middle class shrank in every state.
Another reason that locking-in lower mortgage rates is important concerns credit. When lenders look at your debt-to-income ratio – the DTI – they like to see as little recurring monthly debt as possible. A lower cost for mortgage financing is one way to hold down monthly expenses.
So what will the Fed do in the coming months? Despite fancy economic models no one knows but for mortgage borrowers the question ought to be: What happens if the Fed does raise interest levels? Will I have missed the chance to lock in lower costs?
If you expect to stay in place for a number of years, now might be a good time to consider financing and refinancing. For details, speak with lenders and see what programs are available to you.