3 Things Every Homeowner Should Know About 2018 Interest Rates
2018 Interest Rates Are Rising Faster Than High Tide During a Full Moon.
In this article, we explain why interest rates are going up in 2018, how far they may go up, and how you can benefit from knowing your options now.
- Why are interest rates increasing in 2018?
- How high will interest rates increase in 2018?
- 3 reasons why refinancing now is a good idea
Why Interest Rates are Increasing in 2018
The Federal Open Market Committee controls the supply of credit to banks and the sale of treasury securities.
After the real estate crash of 2007, the FOMC stepped in to institute a series of fiscal support policies designed to keep interest rates low.
In the fourth quarter of 2008, the FOMC began a program called Quantitative Easing, investing trillions of dollars toward the purchase of mortgage securities to create liquidity in the secondary market.
This unprecedented fiscal policy was a bold move by the Federal Reserve to artificially keep long term home loan interest rates unusually low over the past 10 years.
Beginning in the third quarter of 2017, the Fed has now begun to gradually reduce its $4.2 trillion portfolio of United States Treasury debt.
This move comes as a strong vote of confidence that the economy’s steady growth is likely to continue, and among other strong economic indicators, is driving home loan interest rates higher in 2018.
How High Will Interest Rates Increase?
As the Government pulls out of the home loan interest rate manipulation game, bond markets are rapidly increasing yields in an effort to attract investors. As bond yields increase, so do mortgage interest rates.
In the below charts, you can see the relationship between increasing yields on the 10 year treasury bonds compared to the Freddie Mac Primary Mortgage Market Survey (PMMS).
The PMMS currently collects information from 125 thrifts, credit unions, commercial and residential mortgage lenders across the Country. This survey is designed to track trends in long, and short term interest rates.
With the Fed pulling out of the interest rate manipulation game, it is unlikely that the increasing interest rate trend will slow down in the near future.
It is even more unlikely that interest rates will go down, or make a downward “correction”.
This is a normal interest rate market, and it is likely to continue to trend in this direction until it settles into the “New Normal”. Of course, it’s easy to be right, until you’re wrong.
There are many opinions out there on what the new normal will be, and this is just one of them. My crystal ball broke in 2007, and it’s been a “wait and see” game ever since.
If I had to make an educated guess, I would expect interest rates on a Conventional 30 year fixed mortgage to reach 5% by 3rd quarter 2018.
How high can they go? Again, my educated guess is that you will see interest rates settle in right around 5% ( +/- .25%) mark, which will be the “new normal” for the foreseeable future.
1. High Interest Rates Affect Home Values
Conforming loan limits increased in 2018, with Fannie Mae citing national home values increasing 6.8% on average. Home owners are benefiting from increasing home values for the first time in a long time.
Home values are based on how much a home buyer would pay for a home similar to yours. We are currently in a market where many home owners have low interest rates and are not selling.
Homeowners not selling creates a shortage of home available for sale.
In simple terms, with low inventory (homes for sale) and high demand (buyers trying to get low rates), that drives up home values.
When interest rates increase, it decreases affordability for home buyers. When it’s more expensive to borrow money, home buyers qualify for less.
In a normal housing market, this results in a decrease in demand, which means that home sellers are forced to lower sales prices to have access to more buyers.
Why timing is important
As interest rates increase, home buyers that were previously thinking about buying are going to rush into the market to buy before affordability is out of reach.
As home buyers rush to take advantage of interest rates while they are still in the 4% range, expect low inventory to create bidding wars, driving up home prices up in the short run.
As interest rates settle into a “new normal”, home values may slow down, and potentially even begin to come down in areas that were over-priced to begin with.
2. Cash Out Refinance
There is potentially a “sweet spot” where homeowners have an opportunity access equity in your home while interest rates are still relatively low.
Reinvesting home equity into home improvements will help preserve the value of your home in the future. Deferred maintenance is a major factor in lowering the value of your home if you want refinance or sell the home in the future.
With conforming loan limits increasing in 2018, you now access to more of your equity for home improvements, debt consolidation, or other investments that require a down payment that you do not currently have in your savings.
A cash out refinance is your opportunity to access your equity on a “one-time” basis, and fix your payments and interest rate for the remaining term of the loan.
HELOC Interest Rates are Adjustable
The alternative to a cash out refinance is a home equity line of credit, or HELOC. A HELOC is an adjustable rate mortgage that is tied to the Prime interest.
The Federal Reserve has already committed to increasing rates 3 more times in 2018. This increase directly affects how interest rates are determined for a HELOC.
The last few increases have been .25% – that directly increased the interest rate on a HELOC by .25%.
The recent rise in interest rates are in part being driven by the expectations that the Fed will increase rates 4 times in 2018 instead of the projected 3 times that are already factored into the market.
If each of these scheduled increases are .25%, you’re looking at HELOC interest rates increasing between .75% and 1.00% in 2018.
A HELOC sounds like a good idea initially because of the interest only payment. One inherent danger of using an interest only home equity line of credit is that interest rate increases are already a fact.
It’s not a matter of “if”, only “when” those increases will occur.
Another inevitability with a home equity line of credit is that it will convert to a fully amortized, adjustable rate mortgage after the 10 year interest only term is up.
This will force the hand of many homeowners that would have challenges making payments on this new reduced term, high interest rate second mortgage.
A HELOC is a great option if you have the discipline to borrow against your equity with a HELOC, and then pay that balance off quickly, leaving an open line of credit available for emergencies.
If You Have a HELOC Now
If you have a HELOC now, you likely have already moved past your “introductory rate” and have seen your interest rate increase in 2017.
Your rates will continue to increase throughout 2018, and if your HELOC is set to fully amortize in the next few years, now might be the time to pay off that HELOC with a cash out refinance.
3. Remove Mortgage Insurance
Most homeowners are not going to consider a rate and term refinance when interest rates increase. Especially considering that interest rates have been so low for so long, it’s unlikely you would be able to lower your interest rate now.
With the increase of home values over the past couple of years, many homeowners are eager to remove mortgage insurance.
Mortgage insurance is permanent on FHA loan, and refinancing is the only way to remove it. Conventional loans that had less than 20% equity at the time of the last home loan may also have PMI.
Conventional PMI can be removed by the lender once you pay down the original principal balance to under 20% (by request), or automatically at 78% loan to value.
In most cases, your actual interest rate will increase by doing a rate and term refinance to remove mortgage insurance.
If makes sense to take a higher interest rate than you have now if the effective interest rate, which is your actual rate plus the mortgage insurance, is higher than your new actual interest rate after the refinance.
Rate & Term Refinance to Pay off Student Loans
Fannie Mae made changes to their guidelines in 2017 to allow you to pay off Student Loans without the costs associated with a cash out refinance.
If you have student loans, or if you co-signed for student loans, you can now do a rate and term refinance to pay off that debt. This would make sense if your student loan interest rates are higher than current mortgage rates.
Parents that have co-signed on a student loan for your son or daughter can take advantage of this new guideline to help your kids get a head start and avoid student loan payment issues when trying to buy their first home in the future.
Explore Your Options
If you have questions about how rising interest rates will affect you, if you should consider a cash out refinance, a HELOC, or if you should just stick with where you’re at now, it’s important that you consult a professional loan officer that does this for a living.
A professional loan officer will listen to your goals, analyze your options, and guide you through the decision making process to determine the best decision for you and your family.
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If you’re ready to start saving now, let our mortgage experts do a FREE home loan analysis that will show you all of your refinancing options.