This week’s blog post in our “Financial Planter” series is written by Eric Hutchinson, a Financial Services Professional.*
Will mortgage rates go up anytime soon?
Yes, mortgage rates will probably rise in the future. Here is some background on why this is likely to happen and what you may want to do about it. The Federal Reserve has raised its key interest rate three times since the financial crisis of 2008. Two of those rate hikes occurred in just the past few months and many Fed observers expect that we will see additional rate hikes, possibly even more this year. When the United States Federal Reserve raises its benchmark rate, all other rates will tend to rise over time. This means that interest rates on savings accounts, bonds, mortgages, loans, credit cards, etc. will likely rise to reflect the new rate issued by the Fed.
Why the Fed raises rates
From the Fed’s point of view, raising rates is, among other things, an indication that the U.S. economy is doing well and growing. Rising interest rates help keep a growing economy from growing too fast and causing other problems. Fed Chair Janet Yellen, quoted at a news conference after the latest rake hike, said, “The basis for today’s decision is simply our assessment of the progress of the economy, and it’s doing nicely.” While it is generally agreed that we are not experiencing a robust rate of growth or an overheating economy, the U.S. economy continues to chug along, expanding at a moderate pace. Employers are hiring, unemployment is falling, consumers are spending and businesses are starting to invest a little more into growing their business. All of these economic indicators support the expectation that the Federal Reserve may continue to raise rates in the coming months and possibly over the next few years.
The impact of Fed rate hikes
As the Fed raises rates, mortgage rates are likely to increase as well. If mortgage rates do rise, there could be a negative impact on real estate sales of new or existing homes, as higher rates will begin to squeeze some potential buyers. If you are planning to buy a home or perhaps refinance your existing mortgage any time in the near future, you may want to accelerate your efforts and get a new mortgage in place sooner rather than later. Remember, the higher the interest rate, the higher your monthly payment and the more total interest you will pay over the life of the loan. If mortgage rates rise and therefore your potential monthly payment rises, you may not be able to afford as much home as you could with lower rates. Rising mortgage interest rates may make a refinance of your existing mortgage less attractive than it was before.
Is there a silver lining on rising interest rates?
On a more positive note, rising rates may cause some potential home buyers to be a more attractive customer for lenders. At very low interest rates, only an exceptionally well-qualified buyer may be able to get a new mortgage. With the advent of higher rates, lenders can potentially afford to take on a less than perfect borrower because the lender may have more “spread” to help offset the risk of loan defaults. Further, savers will potentially enjoy higher interest rates on their savings. Investors may earn higher rates of return on treasury bonds, corporate bonds, and municipal bonds. While loan rates may also rise for purchases of other items such as automobiles, home furnishings, and more, the higher prevailing rates may open the field for more people to qualify for a loan and therefore be able to obtain what they need.
Interest rates have been rising and falling for as long as there has been lending activity anywhere in the world. The ebb and flow of interest rates is nothing new and I do not look for that endless up and down cycle to change. We have been in an extraordinarily low interest rate environment for an extended period of time. Rates have been very low and even reached historic lows. We are probably in a period of time where we will see interest rates rise and gradually return to more “normal” levels. That by itself is not a good thing or a bad thing, it is just is where we are in the interest rate cycle.
What action to take now
If you are thinking about buying a house and plan to have a mortgage to finance the house, acting now may help you lock in a lower rate. Act now, get your best deal, and you may soon look back and feel very satisfied with your decision to move forward. If you have been considering refinancing your existing mortgage, the same holds true. Act now and you may be very happy about your actions in the not so distant future.
- Eric Hutchinson, CFP®
All content provided in this blog is supplied by Eric Hutchinson and is for informational purposes only. Barclaycard makes no representations as to the accuracy or completeness of any information contained in the blog or found by following any link within this blog.
Eric Hutchinson, CFP® (http://erichutchinsonfinancial.com) is an author, speaker, and financial adviser with more than 30 years of experience in the areas of financial planning, investments, estate and tax planning. His new book “The Financial Briefing,” distills time-tested wisdom based on decades of professional experience and provides an overview of many of the financial and life issues everyone will face at some point. Hutchinson is passionate about working with families to help them manage their financial affairs, and ultimately make their dreams a reality. He knows money is a key factor in maintaining a level of comfort and peace of mind, regardless of age.
The opinions in the preceding commentary are as of the date of publication and subject to change based on subsequent developments and may not reflect the views of the firm as a whole. The opinions expressed in this letter are those of the author and not necessarily the views of United Capital Financial Advisers, LLC. Certain statements contained within are forward-looking statements, including, but not limited to, predictions or indications of future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties. This material is not to be relied upon as a forecast, or research or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. United Capital does not warrant the accuracy or completeness of the information. The commentary is intended for information only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. Past performance doesn’t guarantee future results.
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