After months of hinting, the Federal Reserve announced an increase in the benchmark interest rate by a quarter of a percent in mid-March. The change in rates has not disturbed the stock market and mortgage lenders.
As for the housing market, expectations are that mortgage rates will hit the 4.5 – 4.75% range by the end of the year. Here’s how you may be affected if you’re buying or selling a home.
Most of us jump right to mortgage rates when we think of rate hikes. Standard mortgage rates are actually tied to the 10 year treasury bond, which means you will not see a direct correlation between the Fed’s increase and the rates available for home loans. They do tend to move together generally though, so mortgage rates will likely rise throughout the year.
For house hunters, this will ultimately mean more expensive financing. If you’re looking to purchase a property, you’ll save some money by locking in more affordable rates while you can. You might also find the supply of available housing a little tighter. If someone who has a low rate now is on the fence about selling, they might not want to enter the market knowing their next mortgage will be at a higher rate.
For sellers, you shouldn’t worry about buyers fleeing the market just yet. After all, we are still very close to record lows, and many experts don’t expect buyers to reconsider a home purchase until rates rise significantly higher. Also, lenders will likely loosen lending guidelines if rates increase, because they have more incentive to do so. This could mean more potential buyers on market.
If you are neither buying nor selling at the moment, just enjoy your historically low interest rate. Or consider refinancing if you haven’t already done so.
Adjustable Rate Mortgages
If you’re a homeowner who currently has an adjustable rate mortgage, you should expect a change in your payment. Since this increase typically happens only once per year, it is likely to be more significant after the expected third rate hike in 2017. So be prepared for a bump in the amount you’re paying in interest each month.
Sellers need not worry too much about ARMs, except to note that buyers may be more wary of them as rates continue their rise. Although, if you currently have an ARM and are considering putting your home on the market, it could save you some money to list it sooner rather than later.
Buyers considering an ARM should keep in mind that a low rate up front will likely cost more once you start seeing increases. If you’re not planning on owning for long, usually five years or fewer, it could still be an appropriate and affordable option for you. Be sure to consider all the variables, present and future, when deciding on your financing choices.
Home Equity Lines of Credit
Homeowners who opened a HELOC to take advantage of low rates should keep in mind that the rate is adjustable and will likely increase soon. This could put a damper on home improvement projects or other purchases, but increases will be gradual. Just as financing a new home will become more expensive, financing improvements will cost more as well.
For owners, higher rates might make it more difficult to sell a property that needs a lot of work. However, this factor is still minor compared to the many other issues a buyer looks at, especially with such minimal increases in the benchmark rate.
Credit Card Debt / Auto Loans
Debt of most any shape or size is going to get more expensive. For example, financing the purchase of furniture for a new home purchase will end up costing more than it did last year. Homebuyers will also ultimately have a larger debt-to-income ratio if they are paying more in interest each month on credit cards, car loans, or store credit cards.
Fortunately, not every effect of rising interest rates is negative. Savings accounts and certificates of deposit should eventually see better rates. But banks, hoping to expand their margins, will be slow to raise the payout on savings accounts. When those changes eventually occur, they are unlikely to match the increases in loan rates.
For people living on fixed incomes, however, an increased interest rate should mean their money goes farther and lasts longer (assuming debt doesn’t play too large a role in the picture).
Whether you are a buyer, a seller, or neither, you could see gains from the Fed’s rate hikes if you are invested in stocks. For one, higher interest rates mean that investors can turn to less risky options and still expect returns, which should have a calming effect on the market.
Also, the rate increases are a sign of a healthy economy, which is driven by the same factors that drive increases in the stock market.
Rate hikes get a lot of attention in the news, in part because they have been so rare in recent memory. While they affect the housing market, many of these impacts are minor or offset each other. By sticking to the fundamentals, in both buying and selling, you can negotiate the market without worrying about the Fed’s next decision.