Fed hikes interest rates: what it means for homebuyers, owners, and mortgage refinancers
The Fed's short-term interest rate hike won't have an immediate impact on the housing market, but the recent run of low mortgage rates will certainly end eventually.
A 'for sale' sign is posted in front of a home in Miami.
Lynne Sladky/AP/File
Wednesday鈥檚 move by The Fed to hike short-term interest rates by 0.25% doesn鈥檛 mean that long-term rates 鈥斅爈ike聽聽鈥� will immediately聽rise. But the run聽of low mortgage rates will certainly end eventually. Whether it鈥檚 sooner or later, there is simply no need to be caught by surprise.
Evaluating聽where you stand now, and how your housing budget could be affected when mortgage rates do go up, could save you thousands of dollars in interest costs. In other words, it鈥檚 not time to panic, but time to plan.
Get advice from a mortgage broker:
- Understand what you can afford
- Find the best loan
- Get approved and funded in 15 days
For all borrowers, rising rates make it harder to get a mortgage.
Jonathan Smoke, chief economist at Realtor.com, expects a 0.50% increase in mortgage rates over the next 12 months. Even that small of an increase can make it more difficult for borrowers to qualify for a loan.
鈥淏ased on analysis of loan-level ratios for a large sample of loans approved in the first half of this year, as much as 7% of mortgage applicants would have failed to get approval as a result of higher debt-to-income ratios caused by higher rates,鈥� Smoke says.
Here鈥檚 a plan of action for each type of borrower:
What higher mortgage rates mean for first-time homebuyers
As mortgage rates creep higher,聽聽may have to lower their target home price. Each half point (0.50%) increase in the interest rate adds close to $100 a month to a payment for a 30-year mortgage on a $300,000 home. To maintain, house hunters may have to modify聽their wish lists to include聽smaller homes, fewer amenities or longer commutes.
What to do now:聽Improving your credit score will help earn you a lower mortgage rate, and that鈥檚 even more important when interest rates are rising. Reduce debt, check your credit report for errors and save as much as you can for the down payment.
How rising interest rates will affect聽repeat homebuyers
If you expect to move in the next couple of years, it鈥檚 quite possible that you鈥檒l be trading a lower interest rate mortgage on your current home for a higher one at your new address. If housing prices continue to rise while interest rates climb, affordability will become a greater factor in making a聽move.
What to do now:聽Moving from one city to another will require research into home values and聽. A raise in pay that looks good now聽may not serve you as well if you move to a higher-cost area. In-city moves will be easier, but upgrading to a larger or newer home will require consideration not just of a higher price, but also the impact of a likely higher interest rate.
What the Fed鈥檚 rate hike means for home refinancing
In an era of low interest rates, home refinancing became almost a biennial tradition for some homeowners. Now, as a reverse cycle begins, that fever will surely subside. It鈥檚 time to take some preventive measures.
What to do now:聽Check your current mortgage rate. If it鈥檚 been a few years since you bought or refinanced your home, you鈥檒l want to compare your current interest rate to聽聽to see if refinancing makes sense. It could be a long time before we see interest rates this low again.
What a rising interest rate environment means for ARM holders
If you currently have an adjustable-rate mortgage and plan to聽stay in your home for several more years, it鈥檚 time to consider refinancing into a fixed-rate loan. Of course, you鈥檒l need to also weigh fees and closing costs.
What to do now:听颁丑别肠办听聽to see if this could be a good time to convert your ARM to a fixed-rate loan, before rates move much higher.
How to manage a HELOC as rates rise
, or HELOCs, deserve healthy scrutiny when rates are rising. Tapping your home鈥檚 equity with the ease of a credit card can back you into a corner fast. Before you know it, you can have a sizable balance accruing interest, just as rates start moving against you.
Even worse, you might be approaching the end of your draw term and facing a payout period at the very time interest rates are climbing.
What to do now:聽Some lenders offer conversion features, allowing an adjustable-rate HELOC to become a fixed-rate home equity loan. If you don鈥檛 need the ongoing availability of your equity reserves, you could lock in a final equity draw with a conversion to a fixed-interest loan at current low rates. If that option isn鈥檛 available to you, consider doubling up on your principal-reduction payments while rates are still low, or investigate the possibility of refinancing the HELOC balance into your primary mortgage.
This time, it鈥檚 different聽鈥� or is it?
Due to some economic conditions, some financial experts are saying聽. But as famous investor John Templeton said, 鈥淭he four most dangerous words in investing are, 鈥楾his time it鈥檚 different.鈥� 鈥�
No one can predict an economic cycle and how it will unfold 鈥� or unravel. By taking a close look at your current and near-future mortgage needs, you can best prepare for what鈥檚 next.
Hal Bundrick is a staff writer at NerdWallet, a personal finance website. Email:hal@nerdwallet.com. Twitter:聽
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