How Does Federal Reserve Rate Hikes Effect You Refinancing Your Mortgage?

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After a small drop in the last month in March 2018, mortgage refinance rates have been on the rise again as the Federal Reserve has been raising rates. According to the Freddie Mac weekly rate survey of the last week of March 2018, the rate for a 30 year fixed rate mortgage was 4.58% from 4.54%.

This was after the Federal Reserve recently voted to raise the benchmark interest rate to its highest level in 10 years. According to Chairman Jerome Powell, there have been strong job gains and a low unemployment rate in 2018. This indicates that the economy is getting stronger, so more rate hikes are probably on the horizon.

federal reserve

People who want to buy homes or refinance should be aware that mortgage rates are likely to rise in 2018 and 2019 more as the federal fund rate is increased. Here are some effects to look for if you are trying to refinance or get another mortgage in the near future.

Rates on Long Term Mortgage Loans Will Slowly Rise

While rates for 15 and 30-year mortgages have been on the rise, it is key to point out that their rates are not locked to what the federal funds rate is doing. These loans are largely based upon the interest rate for 10-year Treasuries. Borrowers who want to get a 30-year mortgage are not always directly affected by the latest rate hike by the Fed. If you want to refinance your current mortgage, it is worth looking at what the trends are for the 10-year Treasury notes. If your current rate is not at least .5% above what the current rate is for a 15 or 30-year loan, you may want to consider just keeping your first mortgage as it is.

Some experts think that as the Fed continues to increase rates, a strong economy and a growing deficit will push the typical 30-year fixed rate mortgage to 5% in the next two years. This would be the first time the rate has hit 5% since 2011. One expert even said recently that a 6% rate could be possible in two years. If that was the case, the time of refinancing first mortgages would be at an end for most people. But even if long term mortgages rise to that level, that would take us pretty much to a normal interest rate environment. Since the last financial downturn, we have been living in a low interest rate environment.

2nd Mortgages Could Cost More

Perhaps you are satisfied with the rate on your first mortgage. The last several years have seen very low interest rates for 15 and 30-year loans. If your rate is below what current rates are, you might be thinking about a 2nd mortgage. But borrowers who are considering a 2nd mortgage should also be aware that their rates also may rise soon.

The recent Fed hikes is known as the tide that will life all short-term interest rate boats. These types of loans are tied to the prime rate. When the Fed changes the federal funds rate, the prime rate will change too. This means that a .25% increase in the Fed rate will lead to a .25% increase for a home equity line of credit as well.

If you have a current HELOC, it is likely that the rate will be higher than a year ago. It will depend upon whether it is tied to the one-year Treasury or the LIBOR, but it will certainly be higher. Some experts believe that many HELOCs will rise to 4.75% and even 5% this year. This could result in an adjustable rate mortgage rising as well.

If you are in that boat, experts say you may want to refinance your ARM into a fixed rate, 30-year mortgage as soon as you can. According to BankRate, You can still get a 30-year loan in the low to mid 4’s, but this may not last much longer.

The bottom line on the Federal Reserve rate hike is that mortgages are getting more expensive. People who want to refinance their first mortgage are probably going to do it very soon. If the rates edge up to close to 5% in the next year, it probably will be too high for millions of people to refinance anymore.

While this is unfortunate for many Americans, it is important to remember that the stronger economy means good news for millions of workers. Unemployment is very low, and wages are rising. More people than in many years are now able to afford to buy a home, even if rates are higher, and even if some people cannot refinance their first mortgages.

About Bryan Dornan

With over 20 years in the mortgage industry, Bryan Dornan has started several companies, such as the Lead Planet, Mortgage Lenders Plus and the Refi Guide. Mr. Dornan has written hundreds of finance related articles in an effort to promote home-ownership to consumers across the United States.

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