By Jeffery A. Long, CPA
Vice President, Lending, Apple Federal Credit Union
The spring season is prime time for home sales. The Federal Reserve’s long-awaited interest rate hike has left some mortgage holders and those thinking about seeking a mortgage unsure how to react. Don’t be deterred. Understanding what this rate increase means will help you make better buying decisions so you can take full advantage of the robust spring market.
First it’s important to know that Federal Reserve fund rates are not directly linked to 30-year fixed- mortgage rates, so they don’t uniformly go up and down when the Fed makes changes. In fact, many other economic factors affect mortgage rates, including demand for housing, inflation, and employment levels.
Interest Rates for Mortgages are Still at Historic Lows
With the economy chugging along and unemployment back to pre-recession levels, mortgage rates (even with an interest rate hike) remain at historically low levels, making this a good time to buy a home. In recent months, Freddie Mac’s average for a 30-year fixed-rate mortgage has drifted between 3.5 percent and 4.75 percent, holding right now below 4 percent.
Housing Trends Continue to be Strong
Other good news is that home values are increasing and making their way back to “normal.” Buyers can once again see housing as an investment and sellers can feel good about a more fairly valued home price, while current owners enjoy returning equity in their investment. The key is that rising home values are consistent and sustainable, which creates a strong market. Indicative of this, in the fourth quarter of 2015, the median sales price for a house in Washington, DC, was $510,000, up 5 percent from last year during the same quarter. Other locales followed suit with the median sales price for a house in Silver Spring, MD, at $372,950, up 6 percent from last year, and in Fairfax, Va., the median home sales price was $475,000, up 3 percent.
Choosing a Mortgage Product
So what’s the right mortgage product given the interest rate hikes? It depends on what your long term goals are, but here are a few things to keep in mind.
1.Adjustable Rate Mortgages and Lines of Credit Impacted by Rate Changes
Unlike 30 year-fixed rate mortgage rates, adjustable rate mortgages and home equity lines of credit are tied to shorter-term rate indexes; and therefore will be more directly affected by the Federal Reserve rate hike. If your time horizon for living in the home is longer than 10 years, that may make 30 year fixed mortgages more appealing for you right now.
2.Consider Refinancing ARMs
If you are planning to stay in your home for a short time, an ARM may be a good bet for you. If you have an ARM that currently readjusts annually or will readjust soon, you should consider refinancing to a fixed-rate mortgage now as this could save you a significant amount of money in the future. Conversely, if your adjustable-rate mortgage rate is locked in place for a few years, it’s probably best to wait and see what the future holds.
3.Fixed Rates for Home Equity Lines May Cost More
If you are looking to use your home’s equity to make improvements before selling it, you should be aware that Home Equity Lines of Credit are likely to rise with the Fed funds, averaging about 5.5 percent. You pay a premium to be able to lock into a fixed rate so they are higher than what you would pay for a variable rate. Conversely, a variable rate Home Equity Line will be cheaper now but could expose your loan to higher interest payments if rates were to rise. Before locking into a fixed or variable rate, take the size of your loan and the amount of time you plan to pay it off into consideration.
Don’t be put off by the headlines. Record low mortgage rates, a strengthening local economy, and increasing housing prices mean that spring is shaping up to be another robust shopping season for homebuyers and sellers. As always, be a smart shopper. Ask your lender lots of questions to fully understand the variety of mortgage products available to ensure that you are getting the best solution.