Many experts think that FHA interest rates could be in for some unpredictability in 2017. In the last decade, FHA loan rates have been competitive with conventional mortgage rates associated with prime loan programs backed by Fannie and Freddie.
The Federal Reserve plans to meet in February, and a critical non-farm payrolls report is due to be released soon. This will represent the first full monthly report since President Trump was sworn in.
Many believe that what happens in February could set the tone for mortgage rates for the year – both conventional and FHA loan rates.
Generally, there is economic optimism in the air. Unemployment dropped, the work participation rate is up, wages are rising, and the Dow recently went over 20,000 for the first time ever.
Current FHA Mortgage Rates Remain Low
Markets are going to be watching to see if these trends continue in February. Higher wages and more people working heats up the economy and can lead to inflation, which can cause rates to rise. Also, the Fed could decide to raise rates again because of signs of strong economic data.
While it is true that better economic activity could lead to higher conventional and FHA loan rates, many would argue that this is a good thing.
If people are making more money and unemployment is lower, people can certainly afford slightly higher mortgage rates. Also, experts remind consumers to remember that mortgage rates are still historically very low. Even with rates in December 2016 at a three year peak, they were still very low:
- Conventional: 4.14%
- FHA: 4.02%
- VA: 3.76%
The FHA mortgage was viewed as an especially good deal. FHA loans are used in about 40% of 1st time home buyer loans. FHA loans have very flexible lending standards and it is possible to put down as little as 3.5% on a home.
But what is the future going to bring?
Trump’s First Year on Office
One of the reasons it is hard to predict conventional and FHA rates for sure is that with a new president, things are more up in the air. Usually, when a president has been in office for a year or two, mortgage markets are easier to gauge. Most often, the non-farms payrolls and the federal open market committee meeting announcements early in the year give us a good idea of rates for the year.
But a new president coming into office with rather unknown economic plans tends to make the situation harder to weigh. Here is some of what we know:
- Since he won in November 2016, the stock market has been going up, as have mortgage rates, although the latter are still low in historical terms.
- The administration has stated it wants $1 trillion in infrastructure spending and tax cuts. It is unknown how much of this will become reality once the proposal works its way through Capitol Hill.
- Interest rates usually increase in a higher inflation environment. Here’s why: Investors purchase more mortgage backed securities that come with a given rate of return. The rate that investors get is tied to the rate of your mortgage. Rates need to be higher than whatever inflation is. Prices in the economy today are increasing at 1.7% per year, according to the Consumer Price Index.
- If inflation gets to 4%, you will not see 4% mortgages anymore, for FHA or anything else. A decade ago, FHA mortgage rates were over 6%.
Many, many eyes will be closely watching what the Trump administration is intending on its spending and tax plans. And even more importantly, they will be watching whatever makes it through Congress into law. If we see a stimulus and substantial tax reform, many experts believe we will see more economic growth and higher inflation. This could lead to higher mortgage rates.
Also, once it becomes clear what is going to be enacted into law, market will likely price in rising inflation if they think it is likely. This could cause FHA mortgage rates to rise faster.
December 2016 Meeting
It also is instructive to review what happened at the December 2016 meeting of the Federal Reserve. The Fed voted to raise the benchmark rate by .50%. The hike alone did not affect mortgage rates though.
The market factored that hike into the rates as they stood in December. No, it was the prediction of three more rate hikes in 2017 that sent mortgage rates higher.
Remember that four times per year, the Fed issues projections for future increases in the Federal Funds Rate. Last September, it predicted two hikes for 2017. But in December, it said they would do another hike, which would in all total ¾ of one percent in total hikes to the Fed Funds rate by the end of 2017.
So, this put Wall Street on notice, and this is why we have seen an increase in rates on most mortgages lately.
Thus, if you are shopping for a low FHA loan rate this year, you should listen to what the Federal Open Market Committee states at its meetings. At the recent meeting in January, the Committee stated it was going to hold on the Fed Funds rate. The next meeting is in June, and some think at that meeting, they may announce more rate hikes.
This could definitely be the case if it is clearer by then what Trump is doing on taxes and spending this and next year.
Also, keep an eye on the Non-Farms Payrolls report when it comes out. If it is showing stronger signs of economic growth, there is a good chance rates could inch up this spring.
The Bottom Line
It is always complicated to anticipate where FHA interest rates will be in a few months. But generally if you see rising economic activity and rising inflation, rates are going up.
An FHA mortgage may insure an interest rate that is a bit lower than conventional rates, so even if rates go up a bit this year, you still are getting a very good deal. Remember, 30 years ago, people paid 18% interest rates! These days, you can easily get a rate well under 5% even in a rising market.