I bet the Federal Reserve is going to raise its short-term interest rates by one-quarter percent on Sept. 16 after the upcoming Federal Open Market Committee meeting ends.
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That means the prime rate will rise to 7% from 6.75%.
The last time the Fed raised interest rates was July 26, 2023.
When it comes to money, especially mortgage money, how does an increase in short-term interests affect long-term interest rates like mortgages? How do you protect yourself before the short-term rates go up?
Ahead of that likelihood, I’m going to briefly explain why I think the Fed will raise rates.
—U.S. annual inflation rate is 3.4% (as of July) according to the Bureau of Labor Statistics while the Fed’s target rate is 2%
—Energy costs remain high (average price per gallon of self-serve regular gasoline is $5.91 and diesel is at record high of $7.82 per gallon according to AAA) due to the six-month-old war with Iran-adding to the increased cost of just about everything you consume
—August numbers showed robust job growth —162,000 jobs were added whereas economists generally expected just 55,000 new jobs
—Tariffs and trader pressures are inflation’s friend
—Federal Reserve Chairman Waller and Federal Board of Governors are getting more hawkish in respect to taming inflation
I also expect this week’s reports on the Producer Price Index, Consumer Price Index and the University of Michigan’s Consumer Sentiment Report will indicate higher prices and lower consumer confidence, all of which will support a rate increase.
Rate differences
According to Fannie Mae, the federal funds rate is the interest rate at which banks lend money to one another overnight, meaning it’s an interest rate on very short-term lending. Interest rates on short-term bonds and loans move very closely with changes in the federal funds rate.
Credit card interest rates and adjustable mortgages (excluding any fixed periods of usually three, five, seven or 10 years) are directly affected by the Fed rate.
Short-term U.S. Treasury rates are considered one year or less.
While what the Fed does to its benchmark rate indirectly affects mortgage rates, the central bank does not set mortgage rates.
The 30-year mortgage is a long-duration loan, tracking to the 10-year Treasury note.
Besides the Fed’s short-term rate (borrowing money is getting more expensive), the 10-year rate is influenced by long-term economic growth and inflation, federal debt, investor expectations, housing demand and geopolitical events.
In other words, if the Fed raises short-term rates by one-quarter percent, it doesn’t mean mortgage rates will act in tandem with a one-quarter point increase. That said, mortgage rates have been moving up steadily since this years’ low of 5.98% on Feb. 26, right before the war with Iran started.
This week, the Freddie Mac 30-year interest rate averaged 6.76%. That’s 78 basis points higher in just over six months.
What can you do ahead of a rate hike?
Lock in rates on debts before borrowing costs rise. Below are some ideas.
—If you are in escrow to buy a home or in the middle of a refinance, don’t float your rate. Lock in the rate, regardless of whether you are shopping for an adjustable rate or fixed-rate mortgage. There is no more lock-and-shop available to my knowledge (lock a rate prior to going into escrow).
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—If your current mortgage interest rate is north of 7%, you can get yourself into an adjustable-rate mortgage, locked in for the first five, seven or 10 years, and all under 6%.
—If you are considering a reverse mortgage, consider the fixed rate over the adjustable rate. Fixed rates tend to lend less total amount than adjustable rates but at much lower rates. Your negatively amortizing balance will go up more slowly.
—If you have a home equity line-of-credit (rates adjust monthly in tandem with the prime rate plus a profit margin) consider refinancing that into a fixed-rate second mortgage, also called a Heloan. Rates start at 7.125%.
—If you have a large amount of credit card debt, say more than $25,000 and you can’t get ahead of it, consider refinancing that debt into a Heloan as a second lien against your home. After all, a lot of credit cards have an interest rate charge of more than 20% interest.
—If you have a large amount of debt on a buy now, pay later program (with a long-term payment plan) consider a Heloan. Long-term buy now interest rates are up to 36%, according to NerdWallet. You can also combine your credit card and buy now, pay later debt into a Heloan.
—If your consumer debt is too small for some type of mortgage refinance, consider refinancing with a personal line of credit from your bank. On a quick Google search, I found starting rates as low as 7%. Personal lines of credit are adjustable, but they are likely a lot cheaper than credit card rates. Hint: Credit unions tend to be very competitive.
—You can also consider transferring your credit card balances to a 0% introductory rate credit card
—Consider borrowing money from a family member or friend to pay off your high interest rate consumer debt. Just pay that person a generous amount of interest to make it worth their while.
As an aside, if you are thinking about house hunting, now might just be a good time. Nationally, the August housing supply hit a six-year high as new listings jumped. Three in five homes sold below their original asking price, illustrating that buyers are using their negotiating power, according to Redfin.
Freddie Mac rate news
The 30-year fixed rate averaged 6.76%, rising 5 basis points higher than last week. The 15-year fixed rate averaged 6.09%, also 5 basis points higher.
The Mortgage Bankers Association reported a 2.7% mortgage application decrease compared with one week ago.
Bottom line: Assuming a borrower gets an average 30-year fixed rate on a conforming $832,750 loan, last year’s payment was $225 less than this week’s payment of $5,407.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 6.125 %, a 15-year conventional at 5.875 %, a 30-year conventional at 6.625%, a 15-year conventional high balance at 6.125% ($832,751 to $1,249,125 in LA and OC and $832,751 to $1,104,000 in San Diego), a 30-year high balance conventional at 6.75% and a jumbo 30-year-fixed at 6.75%.
Eye-catcher loan program of the week: A 30-year mortgage, 30% down, 5.625% for the first five years payments, and 1 point cost.
Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or [email protected].
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