Greetings everyone! Yesterday, I came back from a busy weekend in Orlando completing my annual certification training for my Florida license. I was excited to get back just in time to play our final game of Camden Football Club’s regular season (Go Team Fairway! We won 7-1). Some of my soccer players are interested in purchasing a house, and are trying to do it soon before “interest rates go up!” and “the Fed is going to raise rates!” (cue the music of dread!)
As I listened to them and agreed that the rates will most likely go up soon, it occurred to me that many people may not know what that actually means. What are interest rates, and what does it mean for mortgages if the interest rate goes up? I am very passionate about educating people and helping them to understand what they’re potentially getting into, and I especially want to clear up common misconceptions with my clients. So, my goal in today’s blog is to do exactly that.
In a nutshell, interest is the cost of borrowing money. When you get a mortgage for your dream home, or use a credit card, or finance a car, you pay that money back with interest. It is, as they say, the cost of doing business (watch out for predatory lenders! See the article https://www.debt.org/credit/predatory-lending/), but there are some pitfalls that people should avoid when dealing with interest rates (more on that in a future blog).
Not only do people borrow money for personal loans or small businesses, even banks borrow money from the Federal Reserve (contrary to Mark Wahlberg’s character in “the Other Guys,” the Federal Reserve is not a prison, HAHAHA!). The banks themselves have to pay back the federal reserve at their own interest rate, so you can expect that the banks, to make a profit, pass along the expenses of paying interest to “the Fed” along to you. What this means: you’ll pay a higher rate than the bank. That’s how banks make money. It’s also how you can make money by depositing money in a bank and earning dividends from the bank (basically, our version of charging the bank interest).
The Fed is responsible for maximizing employment and minimizing inflation. One of the primary ways that they do this is by controlling the national interest rates. For example, during the Great Recession that kicked off in 2008, the Fed lowered the rate to near zero, and kept it there in order to make borrowing money cheap for both banks, businesses and consumers. The idea was to make borrowing and spending money cheaper in the hope of spurring economic growth, as well as help get the real estate market back on track.
Now that the economy has greatly improved, and unemployment numbers continue to drop, the Fed has its eye on inflation growth. To keep the balance between cash flow and bank reserves in order to avoid inflation, the Fed has raised interest rates already this year. While this is nice for the amount of money that your savings earn while in the bank, it’s not so nice for your mortgage payment. This year’s Fed rate hikes have already affected mortgage rates. In January, I saw prime rates of 3.85%, whereas now, the rate for a 30-year fixed mortgage is already 4.49% (Note: I’m going to write a separate blog on the dangers of adjustable rate mortgages and why I recommend fixed rate). So, the mortgage that could have cost you $850 per month in January would now, all other things being equal, cost you $930 per month. If rates continue to rise as expected, that same mortgage could now cost over $1000! That’s the key reason for locking in rates now. While the rate may fluctuate a fraction of a percent from day to day, I can almost guarantee you that the Fed won’t LOWER interest rates for the foreseeable future.
The bottom line: don’t wait on applying for a mortgage if you think that rates will become cheaper by waiting! They won’t! Now that being said, you may have other reasons for waiting (e.g. improving your credit score, saving up for a down payment, paying off other debts, etc.). What I recommend is calling me at Fairway Independent Mortgage Inc. 912 342 4877 and let’s talk about your options. You may not have to save 20% for a down payment if you qualify for a low down payment program. I even have 0% down payment options for VA and USDA loans! I can also help you formulate a plan based on your personal circumstances to get qualified for a loan as quickly as possible. We’ll discuss all of your options with our numerous programs and find which program best suits your needs. You don’t have to wait to find the house. If anything, you ABSOLUTELY SHOULD get a pre-qual letter before you talk to your realtor (see my blog on Pre-Approvals and Pre-Qualification).
While I can’t guarantee what the Fed will do with the rate, I CAN guarantee you the best customer service from our top-notch professionals here at Fairway independent Mortgage Inc. Call us today 912-227-2447!