June 26th, 2017 4:12 AM by Jackie A. Graves, President
Find out how the recent Federal Reserve rate hike could affect
your home-buying and refinancing plans.
month the Federal Reserve hiked rates for the third time in seven months.
Does this mean the end of low mortgage rates? Let’s take a closer look to see
how it impacts your home-buying and refinancing plans.
Fed Funds Rate is an overnight bank-to-bank lending rate. While this rate isn’t
available to consumers, the Federal Reserve (America’s central bank) uses it to
help influence overall rate levels in the economy.
times are tough, the Fed lowers the Fed Funds Rate to stimulate the economy. In
the heat of the 2008 financial crisis, it cut the Fed Funds Rate all they way
down to .25 percent, and kept it there until December 2015, when it felt
the economic recovery had solidified.
it started hiking in increments of .25 percent, and have done so four times:
December 2015, December 2016, March 2017, and June 2017.
though the Fed Funds Rate has now risen to 1.25 percent, traditional mortgage rates haven’t
risen much — and, in fact, are near 2017 lows as summer kicks off.
we say “traditional mortgage rates” are holding near 2017 lows, we mean rates
on primary mortgages that most people get on their homes.
one mortgage product that’s directly impacted by these Fed hikes is the Home Equity Line of Credit (HELOC).
rates are based on two components: a set base rate called a “margin,” plus a
fluctuating rate called an “index.”
index for HELOCs is the Prime Rate, which is a rate that is directly tied to
Fed Funds. In fact, the Prime Rate is the Fed Funds Rate plus 3 percent.
know that the Fed Funds Rate is now 1.25 percent after recent hikes. This means
that the Prime Rate is now 4.25 percent.
anyone with a HELOC now has a rate of 4.25 percent plus whatever their margin
is. Margins are typically somewhere between zero and three percent in addition
to Prime, and your margin is based on your credit quality and how much or
little you’re borrowing relative to the price of your home.
rates rising 1 percent because of recent with Fed hikes means that your monthly
interest cost on a $100,000 HELOC is now $83 more per month.
have or need
a HELOC to get cash out of your home but don’t want to risk
your rate rising further, here’s how to evaluate the difference between a
HELOC, home equity loan, and a cash out mortgage.
reason rates on primary mortgages most people get haven’t spiked like HELOC
rates is because primary mortgage rates are tied to trading in mortgage bonds,
not the Fed Funds Rate.
U.S. mortgage loans up to $424,100 are packaged into mortgage bonds, and these
bonds trade daily in global markets. Mortgage rates fall when prices of these
bonds rise on economic uncertainty, and vice versa.
have been holding near 2017 lows as demand for mortgage bonds remains strong.
The reason for this demand is that these bonds are considered a safe investment
when policy initiatives in Washington and global economic growth looks
uncertain (like it does now).
fixed mortgage rates on loans up to $424,100 are currently at or just below 4
percent as of this writing — please note mortgage rates change throughout
Mortgage Bankers Association updates its rate forecasts monthly, and the June
forecast calls for rates to rise very slightly — about .125 percent to .25
percent — from current levels as we move through the summer. And they call for
rates to be around 4.375 percent as we move into the holidays.
projections can change monthly as the economic and political environment evolves
in the U.S. and globally, but for now you can see that rates might rise by
about .375 percent by year end.
a $300,000 loan, this would mean your payment rising by $66.
that $66 is small, but in the context of the global rate market, this is a relatively
small increase that shouldn’t fundamentally alter how much home many people
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