What’s Behind the Fed’s Decision to Raise Interest Rates?
April 2010 was the last time the national mortgage interest rate sat above 5%. Since that time, the rates have dropped to historic lows, reaching its all-time low of 2.68% in December 2020. But since that landmark was reached, the interest rate has slowly but surely inched its way closer to 4% and if the experts are right, we could very well see interest rates higher than that by year’s end.
This has left many wondering why the Fed is choosing now to change course and start increasing interest rates. Here’s the basics of what we know, so you can speak with your mortgage lender from an informed position, and receive proper guidance and advice as we progress through 2022.
Why Are Interest Rates Rising?
Fed Chair Jerome Powell stated in January that “[T]he economy no longer needs sustained high levels of monetary policy support.” He credited the central bank’s intention to raise rates on strong economic growth, rising inflation, and a bullish market.
How Will Higher Interest Rates Affect First Time Buyers?
As interest rates climb, it will put more strain on Americans looking to borrow. Whether someone is planning on buying a home, a new car, or taking out a student or business loan, everything will cost more than it did just a couple of months ago.
In terms of how this will affect first time home buyers, the increase in interest rates could wind up pricing many prospects out of the market or force them to choose homes they otherwise wouldn’t be interest in. It is important to note that just because interest rates are going up, they are still in a historically low range and will continue to be even if the rate does rise above 4% as predicted.
How Will Higher Interest Rates Affect Refinance Prospects?
One of the main goals of any refinance is to save money. As interest rates rise, those looking to refinance will see their potential for savings drop. Depending on how high the rates climb and on the closing costs associated with a refinance, a lot of homeowners may find it will take many more years just to draw even.
The only thing helping homeowners is the fact that home values are also expected to continue rising in 2022. This increase in equity may be enough to coerce those homeowners who have no intention of moving for many years, if at all, to apply for cash-out refinances. So, while traditional refinances may become less popular this year, cash-out refinances may see an increase in popularity.
The Time to Buy Is Now
Whether you’re a first-time home buyer or a homeowner looking to refinance your mortgage, the important thing to know is that the time to buy is likely now. The longer you wait, the higher the interest rate will likely be when you finally commit.
For first-time buyers, there is always the chance that home prices may drop to counteract the rising interest rates at some point this year, but at the moment, that isn’t looking to be the case.
