Oh, those sly dogs at the Federal Reserve Board. We started 2015 assuring you that they'd raise the short-term interest rate (which indirectly affects consumer interest rates) this year, and we thought earlier rather than later. But after faking us out several times, inspiring lots of breathless commentary in the financial press, they finally made their move on Wednesday, boosting the rate just a tad before the year draws to a close.
Despite the information overload, there still seems to be quite a lot of confusion about what all this means for individual home buyers and sellers. We decided to address some of the questions we've heard from our users.
When does the interest rate hike kick in?
It's already kicked in! Strictly speaking, though, the Fed doesn't raise interest rates for consumers -- it sets a target for the federal funds rate, which is the rate at which banks borrow money. In turn, banks pass on a similar rate to customers. And it took Wells Fargo just 12 minutes after the Fed's announcement to raise its prime rate for borrowers.
As far as mortgages are concerned, those rates were heading up even before the Fed's action. In fact, our chief economist, Jonathan Smoke, has observed that mortgage rates have more to do with trends in long-term bonds than with the federal funds rate.
Is it too late for me to refinance?
Hey, no one's stopping you from refinancing. But most of you who can qualify for a new mortgage probably already have. The key word there is "qualify." Credit has been pretty tight since the housing bust, with lenders afraid of losing money on unreliable borrowers.
There have been some moves this year by government agencies to ease access to credit, but the results so far have been inconclusive. So if credit does loosen up, someone who couldn't previously qualify for a refi could do so while still taking advantage of historically low rates. The Fed signaled that it's going to take it slow with raising the federal funds rate over the next year.
And as usual with a refi, think through the long-term implications.
"The financial math is a function of the cost to refi, the difference between the old and new rate, and the expected time to be in that home to recoup the costs," Smoke says. "With strong price appreciation recently, people could have more equity, qualifying for a lower rate especially if credit has improved as well."
How much more will a typical mortgage cost?
Smoke has forecast that mortgage rates will hit 4.65% by the end of next year. Based on a median-price home ($230,000) purchased with 20% down and a 30-year loan, that change would add $23,223 in interest over the life of the loan.
For perspective, the average 30-year mortgage rate by month for the past 45 years was 8%.
"We are a long way from that," Smoke says. "The real estate market will likely stay strong until we see 30-year rates get above 5%."
Will it be harder to sell a house?
"Not in most markets initially, as rates are still very low by historical standards and demand is much stronger than supply," Smoke says. The challenges will emerge in those markets and price points that are most dependent on financing and sensitive to rates -- that is, where the buyers are carrying a heavy debt load and have a harder time getting a loan. Still, Smoke believes that on the whole there will be more demand in the short term than people with credit difficulties.
What are the most important things for buyers to know?
- Smoke's advice to consumers: Spend as much time on finding the right mortgage as you do on finding the right home.
- Shop around: Follow rates in your local market, and explore different loan products and rate terms.
- Research and measure the potential value of discount points, locks, and float-downs.
- And read Smoke's advice on the numbers you'll need for credit scores, debt-to-income ratios, and down payments.