Mortgage interest rates have jumped about one percent since the beginning of the year. They are now at seven-year highs. Will it continue to climb?
Interest rates have been steadily rising this year. The U.S. Federal Reserve continues to hike interest rates, despite increasing criticism from President Donald Trump. Rising interest rates make the cost of financing purchases more expensive whether it be a car or a home. Rate hikes will impact you in a variety of ways.
According to Freddie Mac, as of October 18, 2018, mortgage interest rates in the U.S. were as follows:
|Loan Type||Interest Rate||Change|
|30-Yr FRM||4.85%||▲ 0.97 1-Yr|
|15-Yr FRM||4.26%||▲ 1.07 1-Yr|
|5/1-Yr FRM||4.10%||▲ 0.93 1-Yr|
Mortgage interest rates bottomed out in 2013. Since then, the 30-year fixed rate mortgage has bounced between 3.5% and 4.5%. However, in April of this year, the rate on a 30-year fixed rate mortgage jumped above 4.5% and nearly hit 5%. The graph below shows the change in the 30-year fixed rate, 15-year fixed rate, and 5/1 adjustable rate mortgage over the past ten years.
How Rising Mortgage Interest Rates Affect You
Higher rates will increase homebuyers’ monthly payments on a mortgage. For homebuyers who don’t have a lot of wiggle room in their budget, the rise in monthly payments will reduce the number of homes affordable to them in their local real estate market. According to Redfin, a buyer with a $2,500 monthly housing budget lost nearly $30,000 in purchasing power this year as a result of rising rates.
If you are in the process of buying a home or refinancing an existing mortgage, you will want to stay on top of interest rates. Make sure to ask the right questions when talking to a loan officer as the interest rate is just one part of the equation.
While the rising cost of financing the purchase of a home is troubling, the silver lining is that this will cool off an overheated real estate market where most major cities are overvalued. We are already seeing home price reductions happening all across the U.S. Let’s hope the recent rate increases prevent home prices from appreciating too quickly.
Will Rates Continue to Rise?
Dallas Federal Reserve Bank President Robert Kaplan said on Wednesday that the U.S. Federal Reserve should continue raising interest rates at least two but probably three more times before assessing whether further rate hikes to restrain growth are warranted. The Fed will meet in November but is expected to defer any additional rate increase until December. However, most Fed policymakers expect rates to rise three more times next year.
If this is true, we can expect an increase in mortgage interest rates.
We should clarify that the U.S. Federal Reserve doesn’t actually set mortgage interest rates. Instead, it determines the federal funds rate, which generally impacts short-term and variable interest rates. When the federal funds rate increases, it becomes more expensive for banks to borrow money from other banks. Those higher costs can be passed on to consumers in the form of higher interest rates on lines of credit, auto loans and to some extent mortgages. Discover does a great job at explaining how the Federal Reserve affects mortgage rates.