It came as no surprise to savvy market watchers when the Federal Reserve raised its benchmark rate in June. The unemployment rate is at its lowest level in decades and U.S. Gross Domestic Product (GDP) is at the highest since 2014. These, and other economic indicators, have spurred the Fed to raise benchmark rates so that the economy does not overheat.
But, there was a surprise from the Federal Reserve meeting in June. The group indicated that two more rate hikes are forecast for this year, bringing the total to four increases during 2018. (Earlier in the year, three increases were expected.)
What does this mean for you and your homebuying clients?
Although average mortgage rates may go up or down on a week-to-week basis, the overall trend calls for mortgage rates to increase for the remainder of this year.
In its June 2018 Economic Commentary and Forecast
, the Mortgage Bankers Association noted, “We forecast that 30‐year mortgage rates will reach 5 percent by late 2018 or early 2019, pushed up by firming inflation, growing deficits, and the strong economy. Faster wage growth is likely to overcome any headwind of increasing mortgage rates, but more home price appreciation in combination with the housing inventory shortage could put a damper on purchase market growth.”1
Mortgage rates remain low by historical standards. But that fact may not be much comfort to prospective homebuyers. With that in mind, there are some strategies prospective homebuyers may want to consider even as the rate on a 30-year fixed rate mortgage trends upward.2
- Consider an adjustable-rate mortgage (ARM). All else being equal, interest rates on ARMs are lower than fixed rate loans. Typically markets price ARMs more reasonably when rates are rising because more risk is passed to the borrower with a loan where the rate (and payments) may adjust upward based on an index.
- FHA mortgages become more attractive for some homebuyers when rates rise. The difference in interest rates between conventional and FHA purchase loans is relatively minor. Given the more flexible qualifying criteria for FHA programs, some borrowers may find that it’s worthwhile to pay the FHA insurance premium and other costs, while also getting a rate that’s nearly the same as a conventional loan.
- Explore VA and USDA loan program options. The rates on VA and USDA home purchase loans have traditionally always been among the lowest rates available. That remains true.
Finally, it’s important to remind prospective homebuyers that getting the lowest possible rate on a mortgage isn’t the only thing they should consider. Rate shopping can indeed save money over the life of a home loan. But, there are so many other factors to consider. Depending on unique circumstances, it can make more financial sense to obtain a loan at a slightly higher rate in exchange for other attractive product features.
- By The Compass Hawaii Team,
Oct 02, 2018
- Strong Economic Growth, Rate Hikes to Continue. MBA Economic and Mortgage Finance Commentary: June 15, 2018. Web. 26 June 2018. https://www.mba.org/news-research-and-resources/research-and-economics/forecasts-and-commentary/economic-commentary-archives
- July 2018 mortgage rates forecast. Tim Lucas. TheMortgageReports.com. Web 20 June 2018. https://themortgagereports.com/32667/mortgage-rates-forecast-fha-va-usda-conventional?updated=1