Small Fed Move Doesn't Mean You Can't Buy a Home
The last time the Fed raised rates, "the iPhone didn't even exist," says Mark Fleming, chief economist for title insurance company First American Financial Corporation.
Interest rates in the U.S. have been close to zero for the last seven years, intentionally kept low to allow employment and the market to recover from the crash in 2008.
For new homebuyers, the expectation of a rate hike spurred many to buy in the months leading up to the decision and encouraged a cycle of refinancing from existing homeowners.
But the moderate rate increase does not spell doom if you're looking to buy a home -- in fact, it may give you the push you need to get out there and buy your home before interest rates rise again, something economists are predicting for 2016.
How will rising interest rates affect you as a homebuyer? U.S. News asked experts to weigh in on whether you should be concerned about your ability to afford a mortgage and what you should know about interest rates in the next year.
The Fed's decision doesn't affect your interest rate as much as you may think. While the interest rate policy changes will affect how interest rates are offered, mortgage rates function separately, and are in fact far more volatile than the Fed's interest rate.
Jonathan Smoke, chief economist for realtor.com, explains rates for new fixed mortgages not only fluctuate on their own, but have changed in anticipation of increased Fed interest rates, without any actual change in policy.
"When you look at the volatility of what rates have done around the 'what is the Fed going to do' all year long, we've had enormous movement in mortgage rates," Smoke says. "We've had roughly 70 basis points of movement in the 30-year [fixed-rate mortgage] alone in the last 12 months when the Fed hasn't done anything."
Rising interest rates don't mean you can't find a mortgage that works for you. The rate hike by the Fed is minor and isn't likely to squeeze too many consumers out of being able to buy a home. You might have to reconfigure what you put down versus what you pay monthly but as Smoke emphasizes, mortgage rates differ from day to day and lender to lender.
"It's like buying gasoline -- it's different by provider, it's different one street to the next," Smoke says.
Higher interest rates can give the push you need. Many economists are expecting interest rates to continue to increase throughout the next year by a total of 1 percent, and while they are small, steady increases, getting a mortgage on the lower end is always a better idea than waiting and paying more.
Steve Rick, chief economist for CUNA Mutual Group, which builds financial products for credit unions nationwide, says that extra push to get homebuyers and other consumers moving in the market could serve as an additional stimulus for the economy.
"We could see faster economic growth next year because the Fed is raising rates, because it will help with confidence, and it will help with people trying to get ahead of the rising rate environment," Rick says.
Increased rates can help keep home appreciation in line with wage increases. As housing markets continue to recover from the recession, home values have been appreciating rapidly, outpacing wage increases and making it more difficult for everyone to afford them.
"When you raise rates, you slow down the pace of house price appreciation," Fleming says, noting mortgage rates will go up regardless of the Fed's decision. By slowing the increase of home prices, the same people who could afford a house today will likely be able to afford the same house down the line, without being edged out by rapid property appreciation.
But at the moment, Rick notes, "housing is still relatively affordable," and after such a long period of no interest rate changes, the Fed's decision to increase rates by 0.25 percent isn't going to stop people from making big purchases such as cars or homes with financing.
If you already own a home, you likely don't have to worry about adjustable-rate mortgages. Because chances are you don't have one. "The majority of mortgages that were taken out in the last couple years were 30-year fixed mortgages," says Svenja Gudell, chief economist for Zillow. "We're talking 85 to 90 percent of originations."
Gudell notes many homebuyers are overinsured with a 30-year fixed rate mortgage -- because the chances they'll stay in one home for 30 years are slim -- but many are not willing to take the risk of facing higher rates down the line in the wake of the subprime mortgage crisis.
But if you get an ARM, you don't need to be scared. ARMs typically have a locked interest rate between five and seven years, so your interest rate is unaffected as long as you're in that period. But even if you are in the floating rate part of your mortgage, Gudell and Fleming agree that rate hikes down the line will likely remain affordable.
"The increase in the mortgage rates are going to be so tame and so controlled that [homeowners] will be able to adjust over time," Gudell says.
Fleming adds that a 1 percent total increase by the end of 2016 will likely bring your interest rate to 4 to 5 percent, equating to about $50 to $70 per month in additional payments, which is minimal. "You can find 50 bucks by going to Starbucks less often," he says.
You should still shop around. Treat your mortgage like any other major purchase -- weigh your options and compare rates before you sign on the bottom line. The mortgage, and your ability to pay it off, are just as important as the house you choose to buy.
"Consumers will be able to mitigate some of the increases by putting as much effort into finding their mortgage as they do in finding their dream home," Smoke says. "You don't just take the first offer; you don't just go to the lender that was recommended. Pursue and understand that you can get different rates."