There’s been tremendous consternation in recent weeks as mortgage rates in most; if not all loan program categories have started to rise.
My phone has been busy with calls from frantic agents and clients who are seeking guidance and wondering, not only what this means for them, but why is this happening. I’ve said before…I’m not a financial market expert; I’m just a mortgage guy! However, there are a few simple concepts that the lay person can understand which are currently driving the mortgage interest rate market.
When the economy is struggling/stagnant (higher unemployment, low wage growth, low productivity, low inflation, etc.), interest rates, and in particular, mortgage rates, are typically low. For the 6-8 years following the beginning of the recession (2008-09) and leading into the 2016 election, this was our reality. As a result, economic forces (global and national) combined with Federal Reserve Policy, kept rates low while propping up the Bond Market (which is the barometer for mortgage rates)…all in an effort to “stimulate” the economy. Well…to sum it up – it worked! As the economy has recovered, as demonstrated by job and wage growth, domestic output, and inflation is on the rise, the need to continue to “prop up the economy” with low rates has diminished. Now the reverse is happening…the Fed (and global/national markets) are working to properly manage the growth and inflationary forces.
So – what does that mean for me?
No one can accurately predict where or when the current upheaval will settle out. For the mortgage market, much of it depends on how individual mortgage companies and banks respond in the short term. I do believe, though, that the days of Conforming Fixed-Rate interest rates consistently being in the 4% range are likely gone for now. Some loans I priced 18 months ago at 4% are now showing up closer to 5%. Depending on your perspective, a 20-25% increase can seem daunting and maybe enough to dissuade you from buying now. Here’s the reality: on a $250,000 loan, an increase in rate from 4.250% to 5.000% increases the payment roughly $112/month…less than 10%. For me, that can sometimes be my Starbucks habit for any given month!
What should I do?
For Homebuyers:
If you’ve just found your dream home and you’re delaying the rate-lock process, hoping for a lower rate…LOCK YOUR RATE NOW! If you’re still shopping….call me! Supreme Lending has a “Lock and Look” program that allows you to lock in today’s rate for 60 days while you shop (30 days to shop; 30 days to close!)
Also – I encourage you to look at other loan products (e.g. Adjustable Rate Mortgages – ARM’s). ARM’s had a bad reputation from the last housing crisis (and rightfully so), however the Dodd-Frank Wall Street Reform Act of 2010 cleaned up the industry and made these products a safe, viable alternative to a fixed-rate program, particularly if a homebuyer knows that they’ll be selling within a 5-10 year period. In a low rate environment when the market is fairly stable (which is what we’ve had for the years leading up to 2017), ARM’s did not financially make sense. In a rising-rate market, particularly when the average person stays in their home for 7 years (or less), it could be a great option!
For Agents:
DON’T add to the media hype and hysteria! Don’t use the “overused” cliché of “rates are still at historic lows.” Most of our clients understand that, even our younger, first-time homebuyers! Sometimes, a small lifestyle change can overcome the perceived “shock” of a higher interest rate. DO encourage your clients to look at the big picture, and NOT fixate on interest rates, or worse, nostalgically yearn for the “days of 4%!” Four is gone for the foreseeable future; Five is the New Four!
Tim Britt is a Senior Mortgage Loan Officer (NMLS 1369718) with Supreme Lending in Franklin, TN, and is licensed to originate mortgages in TN, AL, KY and MI. He can be reached at 615-415-8887 or [email protected]. You can apply for a mortgage online at timbritt.supremelending.com.
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