Thinking about buying a new home or refinancing your mortgage? You may want to do it soon.
On December 14, the Fed announced a .25 percent increase in the federal funds rate —the benchmark lenders use when deciding how much to charge us for loans—to .50-.75 percent, as well as plans for three more hikes in 2017.
While this isn’t directly tied to mortgage rates, the Fed’s decisions can influence them. “We live in an intertwined economic environment, and any decision from the Fed can have far-reaching consequences,” says Scott Mann, president and founder of Mann Financial Group.
Basically, a higher federal funds rate means that banks charge each other higher lending rates, which may then be passed on to those of us applying for mortgages, credit cards and other loans. The yield on the 10-year U.S. Treasury bond is also used as an indicator of mortgage rates, and it’s climbed from 1.46 in July to as high as 2.6 percent in the wake of the election.
It’s tough to pinpoint exactly what will happen next year, “particularly in the exceptionally unpredictable times we’re living in,” Mann says. But rates are on the upswing. Since the election, 30-year fixed mortgage rates have increased every week, and sat at 4.16 percent as of December 29—up from 3.54 percent in early November.
Still, Ralph Grauso, founder of ASC Financial Group in Pennsylvania, and other experts predict fairly modest rate hikes in small increments. In mid-December, Kiplinger forecasted a rate of 4.6 percent by the end of 2017.
“But if I was looking at getting a mortgage, I would get it now,” Grauso says.
It can. Say you borrowed $100,000 at a 4-percent interest rate for 30 years. You’d pay $71,868 in interest over the life of the loan. But the same loan with 5 percent interest would cost an additional $21,388 in interest.
“Lower rates will obviously be beneficial to home buyers and an increase in rates may mean higher costs over the lifespan of a loan. But, ultimately, rates are just one factor that consumers should consider when buying homes,” Mann says.
In other words, don’t make any moves until you’re financially ready. That means you’ve hit your down payment goal and your credit score’s in good shape. (A great credit score can also make a big difference in the interest you’re charged on a mortgage.) And be sure your budget can handle all the associated expenses, including maintenance costs, insurance and taxes, too.