Dear Natalie: Interest rates keep rising. I still have an adjustable rate mortgage. Should I lock in a fixed rate? Signed: Struggling to Make Ends Meet
Rising interest rates will affect homeowners, both sellers and buyers, as mortgage interest rates are predicted to move faster than the Fed Fund rate. If you are planning to stay in your home and you haven't locked in your fixed interest rate, then now could be a great time to do that. However, make sure that you are doing this as part of a serious look at the affordability of your home. If your home is seriously underwater, or if you are treading water to stay afloat on an unaffordable situation, then you need to address these issues before you decide to stay where you are (and lock in a fixed rate and commitment). According to ATTOM Data Solutions, there are still 5.2 million homes that are severely underwater. In many of the most popular cities in the U.S., homes have become unaffordable to the vast majority of the people who live there.
The economic projections indicate that the Feds could take the Fed Fund rate to 2.4% this year, which forecasts at least two more rate hikes spaced out over the 4 meetings that remain. Interest rates are expected to double by 2020, to 3.4%. (Fed Fund rates began 2018 at 1.5%).
Rising interest rates affect everything, including the cost of servicing the $21.1 trillion U.S. public debt. Here are a few of the main considerations for homeowners, buyers and sellers.
If you plan on living in your home for a while, then locking in a fixed rate now will protect you from rising mortgage rates. It’s a good idea to align the payoff date with your retirement date.
I’ve seen a few fixed rate loan modification offers that lock homeowners into a mortgage that is higher than the value of their home. This is generally a bad idea. So is staying in a home that you cannot afford, where you are draining your retirement accounts or taking on high interest credit card debt to make ends meet. Help for distressed homeowners is available. However, solutions that help you will not be found through the bank. (They’ll offer solutions that benefit the bank, oftentimes at the homeowner’s expense.)
Real estate prices are back to an all-time high. Be very careful that you are not buying high, and susceptible to capital losses on your purchase. Broker/salesmen will be tempted to use rising interest rates as a carrot to get you to bite into a purchase now. Yes you are very likely to have to finance at higher rates going forward. However, buying high is never a good idea.
As interest rates rise, fewer buyers will be able to afford your home. So, if you’re in need of selling sometime in the next 12-24 months, particularly if you live in an unaffordable area, then it might be a good idea to consider selling sooner rather than later.
Click to access links to the FOMC press release and the economic projections, released on June 13, 2018.
Here is Lawrence Yun's commentary on the action. Dr. Yun is the chief economist of the National Association of Realtors.
"We are still in the middle innings of rising interest rates; consumers should expect another three or four rounds of interest rate increases over the next 18 months. Mortgage rates will consequently continue to nudge higher. Fortunately, the economy is strong and wages are rising. If housing supply can be increased through more home building, then the negative impact of rising interest rates can be mitigated.”
When the Federal Reserve Open Market Committee raised interest rates on June 13, 2018, the stock market responded by dropping (as has been the trend). The Dow closed down 119.53 points.
The next Fed Fund rate assessment will take place at the FOMC meeting on July 31, 2018-August 1, 2018. I would expect another interest rate hike at that meeting, as the Feds try to stay ahead of inflation and continue to deleverage the Federal Reserve balance sheet.
If you are interested in protecting your nest egg from the next downturn in stocks, in adopting a sustainable budget, in learning more about real estate and homeownership, in reducing your debt and in saving thousands annually with smarter big-ticket choices, then join me at my next Financial Empowerment Retreat. You have two to choose from below. Register by June 30, 2018, to receive the lowest price and a complimentary private, prosperity coaching session (value $300). Call 310-430-2397 or email Heather @ NataliePace.com to learn more.
Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The Gratitude Game, The ABCs of Money and Put Your Money Where Your Heart Is. She blogs on Huffington Post and Medium, and is a frequent guest contributor to national news shows and magazines. She has been ranked the No. 1 stock picker, above over 830 A-list pundits, by an independent tracking agency, and has been saving homes and nest eggs since 1999.