“In some sort of crude sense which no vulgarity, no humor, no overstatement can quite extinguish, the physicists have known sin; and this is a knowledge which they cannot lose.” -
Are Mortgage Rates Going Up?
I think this quote suggests the main reason the Federal Reserve raising the discount rate is pushing mortgage rates higher: they have begun a more rapid, upward trend, and show little signs of slowing down. Generally speaking, when the Federal Reserve raises the discount rate (the rate of interest it charges banks to borrow money from its "discount" window), it has little effect on mortgage rates because mortgage interest involves a long term loan. A bump in the Fed rate generally shows up in credit card interest (which can fluxuate from month to month), and car loan interest (which are generally more short term loans compared to home loans). During and after the recession, to stimulate the economy, the Fed lowered the discount rate to 0%, that's right 0%--the Fed was basically giving money to banks and charging them NO interest.
As you can see by the graph above, starting in 2009, the Fed discount rate was at 0% until 2016, when it saw a 1/4% hike, which was the only increase in the entire year. From 2017 to 2018, it went up 3 different times. In 2018, from January to June, it went up another 3 times, for a total of 6 rate increases in 2 years. Before these increases, the rate had been the same for 6 years.
As banks and mortgage lenders see this trend, they realize the Fed is likely continue this course, and based on their actions so far this year, they are likely to increase the frequency of rate increases. Fed Chairman Jerome Powell has indicated that two additionaly rate hikes are likely this year. Banks and mortgage lenders anticipate these increases, and pass them on to consumers, many times before the actual increases take place.
So, the real question is, what can someone who is looking to purchase a home in the next year do? Interest rates are important because a small change can affect your monthly payment even more than a much larger downpayment.
Notice above a 1/2% interest rate hike increases the monthly payment on a $150,000 mortgage by close to $45 per month. By comparison, it would take putting down an additional $10,000 to lower your monthly payment $47.74 to $668.38 with the same 4% interest rate. So just 1/2% change in your rate has roughly the same effect on your mortgage payment as an additional $10,000 payment (or downpayment).
Here are a few concrete suggestions to help make the most of the current mortgage situation:
⦁ Shop for mortgage rates. Many people worry about shopping for rates because most lenders require a credit inquiry in order to give you specific rate information and many believe multiple inquiries will negatively affect your credit score. This is untrue--if the inquiries are made within a 45 day period, the credit agencies recognize you are shopping for the best rate and will not lower your credit score (click here to read an article on this by the Consumer Financial Protection Bureau).
⦁ Use Seller contributions to buy down your rate. If you are purchasing a resale and not a new construction, you can ask the Seller to contribute funds toward closing costs and use that money to buy down your interest rate, which lowers your overall loan interest rate. This is like paying the bank interest up front, which allows the bank or mortgage lender to lower the overall rate. Check with your lender on specific costs and benefits.
⦁ Work on your credit score. The higher the credit score, the lower the risk to the bank--which equals a lower rate for the consumer. A 50-60 point improvement in your credit score can lower your rate significantly; or, it can actually lower the amount you are required to put down for the same interest rate.
I work with lots of banks, mortgage lenders, and credit unions, but here are the lenders I have had a great work history with:
Good luck in finding the best rate. It is a great idea to get pre-approved by a lender before you begin your home search, so when you find the perfect home, you know what you can afford and can demonstrate to the seller your ability to buy. Here are some new property listings in the area to motivate you to find a good mortgage rate:
“Knowledge is knowing that tomato is a fruit. Wisdom is knowing not to put it in a fruit salad.” This quote found on a T-Shirt worn by an 80 year old woman in a sushi restaurant in Bangkok expr....