Mortgage Rates at End of 2016

Ever since the election mortgage rates have risen .5%, and show no sign of slowing down. This should be a warning to anyone who was planning, or thinking about refinancing in the near future, and a louder siren to anyone planning on buying a home. Rates will doubtfully drop again, so it’s time to reassess your budget. Let’s have a look at what happened and what the next move is.

Why are rates rising?

The election of Donald Trump has made market participants believe that his policies of tax cuts, infrastructure spending, and trade tariffs, will be inflationary.

The rates are directly tied to bonds; and bonds pay the rate of returns to investors annually. If inflation is correlated to policy, the bond investor’s rate of return will be worth a less in the future. When inflation becomes a fear investors sell bonds, and rates rise when prices drop during a major selloff.

Since Trump was elected, bonds have been sold in a panic almost which has led to the biggest losses in almost 30 years.

Mortgage rates were basically at the mid level of 3% all year long, and have risen to a low 4% since Trump was elected. It’s possible to level off, but it won’t likely drop to the rates we saw earlier this year.

Where to go from here

One of the world’s most notable bond investors, Jeffrey Gundlach, believes we have “seen about 80 percent of a post election rate spike”, which is just ahead of the Federal Reserve meeting on December 14. 

He is saying it’s possible for rates to rise a bit more and the final determination will be what the Fed decides.  They make the policy based on two criteria.

The first thing is they control the bank-to-bank lending rate which is the standard rate for mortgage rates in the economy. This time last year they jacked it up by 0.25% when they’ve been keeping it at near zero since 2008.

We can count on the Fed increasing the rate after their meeting, and when they do we can expect the inflation which will drive rates higher. The other impact it will have is driving rates on home equity line of credit (HELOC) second mortgages.

Secondly, the Fed buys bonds that directly impact mortgage rates. This is how they’ve helped keep rates low since 2009. Rising rates will hinder the Feds buying power which won’t allow them to keep rates low.

Rates are going to rise and won’t be nearly low as they have been. It’s unknown how much it will rise, but we will know during the first 100 days of Trump’s presidency.

What does this mean for home buyers and owners?

If you are planning to make a move in the real estate market, below are some things you may want to know.

Last chance to refinance – rates are still low, but if you’ve been waiting to refinance and get a lower rate, look at all your options right away before they rise.

HELOC rates to rise next – if you have a HELOC second mortgage, it’s bound to the Prime rate, and that rises when the Fed rate rises. We are expecting the Prime rate to rise .25% by December, and maybe even a full point by the end of 2017. Ask your loan officer if you can refinance your HELOC rate and get a fixed rate so it never changes.

Homeowners, reassess your budget – if you plan on buying a home and have already been pre-approved, they used a debt-to-income ratio, which will increase with the rising rates. Ask the lender to recalculate your pre-approval with the current rates and see if you still qualify for the loan you want.

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