Never Mind the Mortgage Rate Fear Mongering

December 16, 2015 No Comments »
Never Mind the Mortgage Rate Fear Mongering

It’s finally happened. The Fed raised rates for the first time since 2006.

In their FOMC statement just released, they raised the target range for the federal funds rate to .25% to .50%, up from a previous 0 to .25% range, citing “considerable improvement in labor market conditions this year.”

Ultimately, everyone and their grandma already knew this would happen. That means it’s not really a big deal, despite it being the most talked about news story today.

If anything, the pressure is finally off, seeing that the threat of raising the benchmark rate was an issue for the past couple years. Most pundits will tell you it was already baked in for the most part.

Of course, it could signal the end of the low rate era (not mortgage rates) and the start of gradual, quarterly rate increases, which will have an impact on all of us in one way or another.

You Don’t Need to Buy a Home Right Now!!!

First off, the Fed’s move means very little for prospective homeowners. There isn’t a clear correlation between the Fed rate moves and mortgage rates.

An article in the Washington Post gives us some history. Around the turn of the century, the Fed had lowered benchmark rates to a very low level.

Shortly after, they began raising rates systematically from 2004 through 2006. The Fed raised the target federal funds rate from 1.25% to 5.25% in the span of about two years.

The 30-year fixed averaged 6.3% during the beginning of this period and actually dropped to 5.7% over the first four months.

It then dipped down to 5.58% in the summer of 2005 but eventually increased to 6.68% a year later.

In other words, the 30-year fixed went up about .25% and was lower for much of the time after the first Fed rate increase.

So there’s no real urgency to buy a home now that the Fed is raising rates. And this shouldn’t be a reason to buy either.

On a $300,000 mortgage, the difference in cost between a 4% rate and 4.25% rate is about $44 per month. Sure, it’s slightly higher, but it’s certainly no reason to panic.

And that’s if rates rise…history doesn’t tell us they will, at least not right away. Other things impact long-term rates and we don’t know what will happen in 2016 or the year after.

So when your mortgage broker or loan officer tells you the time is NOW to buy or refinance, ask them why exactly.  Then wait for the awkward clearing of the throat.

Prime Rate Rises to 3.50%

Now here’s something that is actually changing without a doubt. The prime rate, which is tied to HELOCs, is being increased from 3.25% to 3.50%.

This marks the first rate change since December 2008. Wells Fargo already announced the increase. Other major banks will do the same.

For those with HELOCs, their interest rates will rise 0.25% because they are set to the prime rate plus a fixed margin. So yes, they will be paying more each month on their home equity lines.

But guess what? It’s only 0.25% higher. And these loans tend to be pretty small relative to first mortgages.

So let’s say someone has a $100,000 HELOC, which is actually pretty big. Their monthly payment will increase by about $20 a month.

Your cable bill or cell phone probably increased by more in the past year if you paid any attention.

In summary, sure, it does matter that rates finally increased, and it could be a sign of things to come if the Fed keeps raising rates quarter after quarter.

For the HELOC holder, their rate could rise a couple percentage points over the next several years. And that’s definitely significant.

But for would-be home buyers and those looking to refinance, there’s not necessarily a new sense of urgency because of today’s news.

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