This December, after a long, long wait, the U.S. Federal Reserve finally raised interest rates.
Already, some local mortgage lenders are warning that home buyers need to watch out for rising interest rates and buy ASAP! But how will the Fed rate hike really affect mortgage rates? Is it true that home mortgage rates will inevitably rise now that the Fed has taken action?
Fact Check: the Federal Reserve Rate Hike Will Make Mortgage Rates Go Up
First off, let’s be clear, most local mortgage lenders agree the rate hike won’t lead to increasing home loan rates, at least not any time soon. When you hear that the federal reserve raised rates, that doesn’t mean interest rates went up across the board. The rate hike refers to a very specific interest rate that applies to banks; however, that rate is used as an indicator for the U.S. economy at large.
“I don’t think (mortgage rates) are going up,” Ed Yardeni of Yardeni Research told CNN. “Mortgage rates are really tied more to the bond market than the Fed funds rate.”
Remember, as of December 2015, the rate on 30-year mortgages was just 3.97%, which most experts agree is historically low. Even better, few local mortgage lenders expect rates to rise above 4% in the near future.
Under Federal Reserve Chairwoman Janet Yellen, the Fed has behaved cautiously, keeping interest rates at historic lows for the better part of a decade. For years, Yellen has assured investors that the Fed would not raise rates without warning, nor do anything to threaten an otherwise anemic recovery.
So when the Fed finally raised rates in December, the news wasn’t exactly a surprise. The Federal Reserve didn’t so much hint that it was announcing a rate hike as it yelled it from the rooftops for months ahead of time.
And according to CNN Money, even if mortgage rates suddenly shot up to 4.5% in 2016, that would only result in an extra $700 a year on a $200,000 home.
So There’s No Reason To Worry?
No, at least not because of the Federal Reserve hike. Plus, the Fed has been buying up a lot of mortgage-backed securities, which has made it far easier to obtain low rate mortgages.
Of course, it’s hard for most Americans to stop worrying about the economy. Still, 2016 should actually be a great year to secure fixed rate home loans. A certain amount of worrying is prudent, but there’s no cause for panic.
If you’re still worried, then here are some simple things you can do to receive better rates from home mortgage lenders:
- Save up enough to offer a sizable down payment. Most local mortgage lenders require a minimum down payment of 3.5%.
- The Home Loan Learning Center reports that a majority of lenders demand a credit score of at least 680 or 620 for FHA home loans. Spend time improving your credit score if you want to find lower rates.
- Ellie Mae data indicates that most successful mortgage borrowers have an average debt-to-income ratio of 24%, meaning your mortgage payments should be less than a quarter of your income.
- Try to stay in your job throughout the home loan process. Changing positions can sometimes sour a deal.