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How Homeowners Can Retool as the Fed Raises Rates

March 22, 2017

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The big news out of the business world this week largely concerned the Federal Reserve, which voted March 15 to raise its key interest rate for the third time since 2008. While the rate increase was a relatively minor one (only another quarter of one percent), and the Fed’s actions generally go unnoticed by the average American, the move does offer the latest pulse check on the economy at large. This information is useful to anyone buying, selling or owning a home in 2017, and here’s why:

Rates rise, but stay historically low

When the Fed decides to increase its key interest rate, it essentially raises the cost of doing business for banks in the U.S. and around the world. As a result, the interest rate on products like mortgages will usually tick up. However, this difference is often miniscule, and will still keep the cost of a home loan near its lowest point in history. As Marketwatch explained, if the interest rate on a standard 30-year mortgage rises by just 0.5 percent, that will translate into no more than an extra $80 per month paid by the borrower. While this certainly adds up over the life of the loan, it’s a cost that can be reduced or recouped later on through refinancing, purchasing points at closing and several other methods.

Speaking of refinancing, financial professionals often advise against doing so when the Fed begins to raise rates. However, that’s not to say a refinanced mortgage isn’t an option for anyone right now. Marketwatch offered several suggestions for homeowners looking to retool their mortgages in light of this year’s economic developments:

  • Cash-out refinancing is an option that can reduce the amount homeowners pay on non-mortgage debt, like debt from credit cards and other loans. In a cash-out refinance, homeowners convert some of the equity in their home into cash they can use for any purpose. Ideally, this money can be used to pay off higher-interest debt, leaving monthly mortgage payments unchanged but reducing other expenses.
  • Switching to a shorter-term loan might behoove borrowers who have 30-year fixed-rate mortgages right now. By converting to a 10- or 15-year loan, borrowers will need to make additional payments now, but can pay off the total balance faster and usually save money in the long run.
  • Opting out of mortgage insurance, or PMI, is a good move that can be achieved either before a loan is closed or with a refinance. PMI can be avoided by paying a larger down payment upfront, or with a refinance arrangement that focuses solely on eliminating the fee.

Why it’s still a good time to buy

Current homeowners and mortgage borrowers have options when it comes to reducing their monthly payments. However, with this latest financial news, should prospective first-time buyers keep waiting on the sidelines, rather than purchasing a home in 2017?

For most, it’s still a great time to buy. According to mortgage interest rate data from Freddie Mac, the current average 30-year loan rate of 4.17 percent is neck-and-neck with the average logged in 2014. In addition, since 2008, average mortgage rates have never gone above 5 percent. That means since Freddie Mac started tracking mortgage rate data in 1972, it’s never been a better time to be a borrower than in the last decade.

With a wide variety of tools at their disposal, along with unbeatable interest rates, the real estate market appears primed to remain in everyone’s favor for the foreseeable future.

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