Posted by: Ted Highland
Updated: January 24, 2019
After declining for a short period, mortgage interest rates increased in mid-June to 4.62 percent for a 30-year, fixed rate loan according to Freddie Mac. The question now becomes, “How high are interest rates going to go in the coming months, and what should your clients do to prepare for an interest rate increase?”
Where Mortgage Interest Rates Have Been
While the past is not always a reliable indicator of the future, by looking at where interest rates have been, we can begin to anticipate where they might be going. According to Fannie Mae statistics, here are where interest rates on 30-year, fixed rate loans have been over the past five years:
Five Year Trend in 30-Year Fixed-Rate Mortgage Interest Rates
After a five-year period where the total fluctuation was .63% from the highest interest rate to the lowest, in the first six months of 2018, the interest rate has exceeded that amount. Clearly the trend is upwards.
Where Federal Reserve Indicators Show Mortgage Interest Rates Going
Part of the pressure for mortgage rates to rise is the action of the Federal Reserve. It has raised the federal funds rate twice this year. In announcing the latest increase, Fed Chairman Jerome Powell stated that he anticipated two more increases this year, raising the funds rate from 1.50% to 1.75%, and then to 2.1% by the end of the year. He went on to state that by the end of 2019, the funds rate would increase another three to four times to reach 2.9%, and by end of 2020, after continuing gradual increases, it would reach 3.14%. While the federal funds rate does not directly affect mortgage interest rates, it is an indicator of where interest rates are headed and how soon they are going to get there.
What Does This Mean to Mortgage Borrowers?
While no one has a crystal ball, it is possible to theorize that if from where we are today, which is at 4.62% for a 30 year fixed rate loan, if there were four interest rate increases of approximately ¼% each over the next year, then we would end up with a 30 year fixed rate of 5.62%. Following is a chart illustrating the impact that would have on a person’s monthly mortgage payment. Calculations are based on a loan amount of $238,700, which Experian reports as the average loan amount of a home loan in the United States based on the latest data available (April, 2018).
|Interest Rate||Monthly Payment|
With a little bit of quick math you can see that a ¼% increase in interest rate on a $238,700 loan results in an increase of approximately $35 per month. If interest rates increase several times over a period of a year that can result in a person’s monthly payment increasing by approximately $120.
How to Prepare for an Interest Rate Increase
Presently, it appears that mortgage interest rate changes are probably going to be small and gradual. A ¼% increase might not seem alarming, but several consecutive increases could have a significant effect on a home purchaser’s ability to qualify for a loan.
Individuals who are planning on a purchase or refinance should work out how various interest rate increases will affect them. That will position them to be better able to anticipate changes before they occur and take action by being aware of what they can afford. Being prepared instead of panicking is the key. However, be sure to abide by all laws when discussing mortgates with your clients.