In March, the Fed deleted the word “patient” from its vocabulary in raising interest rates. While they will continue to monitor domestic and global statistics, they will also use this data to determine whether to raise interest rates without additional warning.
While the markets still debate the time for an interest rate lift off, most agree that the changes will begin late summer to mid-fall. The other point that consumers and experts will be watching is the rate of future increases including what increment and how fast or slow the Fed will raise rates.
Those with adjustable rate mortgages and equity lines would be affected in the near term. As mortgage experts we watch these changes closely as a broad indicator of our overall economy. But an important distinction needs to be made between the Fed rate (a short term interest rate used for overnight lending to banks) versus fixed residential mortgage rates (long term rates which remain in place for as long as 30 years.
The 30 year fixed mortgage rate would eventually begin to increase too, if our economy remained strong, continued to grow and, most importantly, if individual incomes increase to offset the increased cost of borrowing.
In the current economic environment it is our contention that if long term mortgage interest rates increased 2% or more, there could be a potentially devastating effect on the US housing market.
1. Homebuilders would be more selective in the types of new housing projects they take on in any given community. For a first time homebuyer obtaining a $150,000 mortgage the difference in payment between 4% and 6% is $183.21/month. This represents a 4% increase for those median income earners here in the US. 1MThe US median income has only increased 3.5% total over the last three years.
2. Those with fixed-rate mortgages may be less inclined to sell their homes and move up. The difference in payment on a $150,000 mortgage at 4% versus a $200,000 mortgage at 6% is $483/month. This requires an equivalent 10.7% raise for one making the 1US median income of $53,900 in 2014.
3. And higher income earners with higher priced homes ($400,000 home value and up) need those homeowners mentioned above to succeed in getting raises and acquiring the equity in their current homes to prompt a move on an even greater scale. Regardless of what pundits say, equity in one’s home is still the most important economic indicator of individual financial health and wealth among working Americans. Most have little else in the way of savings.
Rising interest rates certainly aren’t going to help new or existing homeowners. If you’re looking to move, or even refinance, we recommend taking the time to research financing options sooner rather than later and definitely before you make any decisions on buying or selling a home.
If you have questions on how potential rate increases would affect your search for a new residential home, please let us know how we can help you.
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Raleigh Mortgage Man, NC Mortgage Man, Triangle Mortgage Man, Triangle Mortgage Expert all owned and licensed by David M. Damare’. All rights reserved.Tags: Fed interest rate, Fed rates, mortgage interest rates, mortgage regulations, residential mortgage loans, rising interest rates