Numbers Count: Steady climb for mortgage rates ahead?

Chad Royle
Posted by Chad Royle
Mortgage Banking

Numbers count. They matter to bankers and to prospective homebuyers, sellers, and real estate professionals. Here’s my take on the key numbers on the housing market this week.

Two women, one holding a tablet, looking up at a white two-story house with upper and lower balcony/porch.The numbers: The Federal Reserve has begun to raise interest rates, and that means mortgage rates have begun to climb, too. A 30-year fixed-rate mortgage averaged 3.97% for the week ending December 17, up slightly from the prior week when it averaged 3.95%. A year ago at this time, the 30-year fixed rate mortgage averaged 3.80 percent, according to Freddie Mac’s weekly Primary Mortgage Market Survey released Dec. 17. The 5/1 adjustable-rate mortgages averaged 3.03% last week, unchanged from the prior week. A year ago, the 5-year ARM averaged 2.95%.

What counts: It has finally happened. The Federal Reserve has begun to raise rates for the first time since 2006. Many economists expect slight rate increases spread over many months. Here are three things to consider during periods of rising rates:

1) Fixed-rate. If you want stability in your mortgage payment, look at a 30-year fixed-rate mortgage. For borrowers with an adjustable rate mortgage, now — while rates are still relatively low — may be the right time to refinance into a fixed-rate loan to protect against future rate increases. The outlook is for a gradual increase in rates through 2016, which means rates may be a full percentage point higher a year from now.

2) Adjustable rate. If you are trying to keep your monthly payment as low as possible or maximize the size of your mortgage loan, you may want to consider an adjustable rate mortgage. Adjustable rate mortgages typically provide a lower rate than a comparable fixed-rate mortgage, which means on the same size loan, the payment will be lower on the adjustable-rate loan. The risk, however, is that as rates rise the rate and monthly payment on an adjustable-rate mortgage will rise. A 5/1 or 7/1 adjustable-rate mortgage will provide stability for the first five or seven years of the mortgage, respectively, and then the rate will adjust up or down each subsequent year.

3) Financial check-up. Now is a good time to look at your finances. Rates on most consumer loans will move higher as the Federal Reserve raises rates. Rates will likely rise on credit cards, student loans, home equity lines of credit, adjustable rate mortgages, and autos, RVs, and boats. Look at the array of debts you are managing and ask yourself, how will your financial picture change if rates rise 1 percentage point in the next year?

A 1% increase on any individual loan may not have a major effect on your finances. For example, if you are paying off a $5000 debt in 36 months and the interest rate is 18%, the monthly payment is $181. If that interest rate climbs to 19%, the monthly payment would be $183. But, it may be valuable to go through the exercise of calculating your potential higher payments on all your loans, including a home equity line of credit, student debt, and credit cards.

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