Should I Be Concerned About a Mortgage Rate Increase?

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On June 13, the Federal Reserve officially raised the federal funds target rate by .25 percent. This increase marks the second time the Fed increased interest rates in 2018, and experts expect another two increases this year.

Optimistic feelings about the general state of the economy prompted the rate increase. The Fed pronounced the economy to be improving at a “solid rate” and claimed that inflation rates are close to their target goal of 2 percent. Most notably, the U.S. unemployment rate dropped to just 3.8 percent in May, tying with April 2000 for the lowest rate since 1969.

While this might be good news for the economy, all these indicators point to rising interest rates. And, that might not be the best news for current and hopeful homeowners who may be concerned about a mortgage rate increase.

Prospective homeowners may ask: Is it a good time to buy a house? Should I choose an ARM (adjustable-rate mortgage) or a fixed-rate mortgage? Current homeowners may wonder whether they need to take any action.

So many questions! And we’ve got answers! Read on for what you need to know about rising interest rates and what it all means for you.

Mortgage rate predictions for the rest of the year

Here’s what experts anticipate for the remainder of 2018:

  • More market increases. The Fed is expected to raise interest rates again at their meetings in September and December.
  • A healthy economy that keeps growing. With the unemployment rate at a record low and the recent tax cuts keeping the economy strong, business is booming across the country. Hiring is up, and most corporate budgets are able to accommodate salary increases.
  • More homeowners choosing to stay put. In 2017, U.S. homeowners gained $1 trillion in equity. This means most homeowners are now sitting on newfound wealth. It now makes more sense for them to tap into their home’s equity to fund renovations on their homes instead of going through the hassle and costs of a move. Cash-out refinances, in which the homeowner takes out a bigger mortgage and pockets the difference in cash, will be especially popular. When homeowners stay put, it can create a tighter housing market and higher home costs.

Why a healthy economy means a mortgage rate increase

When the economy is thriving, inflation increases. This causes investors to seek higher returns for their investments. Raising mortgage interest rates keeps investors interested in mortgage bonds when the economy is booming.

It’s more than that, though. The Fed wants to keep inflation stable so that it doesn’t spike suddenly, triggering a market panic that can lead to a crash or a recession. By gradually increasing interest rates, the Fed can keep the economy growing at a steady, stable pace.

What are current mortgage rates?

Current rates have already surpassed mortgage rate predictions major housing agencies set at the end of 2017. As of August 1, 2018, mortgage rates are hovering between 4.5 percent and 5 percent. They are not expected to drop anytime soon. If anything, they’ll likely continue rising throughout the rest of the year.

What to do with rising mortgage rates

What to do about mortgage rate increases

If you’re a homeowner

If you own a home and haven’t yet locked in your interest rate, now is the time to do so. Rates are going to continue climbing. You’ll want to get the best current mortgage rate before it gets too expensive to handle. If your rate is more than current mortgage rates, consider refinancing your existing mortgage to one with a lower interest rate.

If you’re in the market for a home

Housing prices have soared over the last seven years. According to the National Association of Realtors, the average price for a home is now $264,800, up by almost $100,000 from 2011. When adjusted for inflation, house prices have increased 33 percent in seven years.

If you’re house-hunting now, don’t pay more for your mortgage than you absolutely have to. Housing agency Freddie Mac urges new homeowners to shop around before choosing a mortgage. Get as many quotes as you can and do your research As when making other major purchases, shop around. Your decision will affect your monthly mortgage payments for years.

“One additional mortgage quote could save you $1,500 over the life of your loan,” Freddie Mac says. “Five quotes could save $3,000.”

It’s also a good time to consider an adjustable-rate mortgage (ARM). ARMs are 30-year loans that have fixed rates for a specified amount of time, usually three to seven years. Rates will then change according to national rates. When mortgage rates are rising, ARMs are usually priced more reasonably than fixed-rate loans. Thirty-year fixed rates now priced about 5 percent, hovered in the high 3-percent range throughout 2017. ARMs are in the same range.

ARMs can give you a fixed, stable payment for up to seven years. After the initial period, they can be adjusted just once a year. There are limits to how much the rate can be increased. Greater Alliance Federal Credit Union offers a 5/5/30 ARM in which the rate is fixed for the first five years and adjusts every five years after that. Click here to learn more.

How Greater Alliance Federal Credit Union can help

Considering refinancing your mortgage? Shopping for a mortgage? We can help determine how mortgage rate increases may affect you. To learn more about our mortgage products, contact us, call (800) 963-1937 or email gro.ecnaillaretaergnull@ofni.