The Fed Raised Rates, So What Will Happen With Mortgages?

by Real estate financingMission+
3 minutes read

Mortgage rates were up this week, averaging 4.16 percent for a 30-year, fixed-rate loan, up from 4.13 percent last week. Last year at this time, the rate was 3.97 percent, according to Freddie Mac.

Dec15 Zoom

As recently as late October, the 30-year fixed was at 3.47 percent, so the current rate does mark a notable hike. In real dollars, what does that mean? An average monthly mortgage payment (assuming 20 percent down) in October for a $268,000 home (the national median home price at the time) would have been $1,280. How much would the same mortgage cost per month at 4.16 percent? It jumps to $1,366, an $86 monthly increase.
And just on Wednesday, the Federal Reserve decided to raise rates for the first time in nearly a year, and only the second time this decade. The target federal-funds rate is now between 0.50% and 0.75%, with the Fed’s state goal of raising rates three more times during the course of 2017.
The Fed announcement took place after the mortgage rate survey was completed, but the rate-raise was expected by the mortgage industry.

What does this mean for mortgage rates going forward?

“Mortgage rates will increase, but not too much” said Redfin Chief Economist Nela Richardson.  “The Federal Reserve surprised Wall Street by suggesting there would be three rate hikes in 2017 instead of the two that were anticipated by investors.
“But for homebuyers, the X factor was never two (or three) modest hikes in the federal funds rate next year. Rather it is the Federal Reserve’s continued investment in mortgage securities, which it began purchasing in the aftermath of the housing bust in 2008. The Fed’s investment in mortgages helps keep mortgage rates low, and Chair Yellen promised that this buying program would remain in effect a while longer.
“As long as the Fed remains a trillion dollar investor in the U.S. mortgage system, a moderate pickup in short-term rates won’t unhinge historically low long-term rates like mortgage rates, and won’t dampen the strong home-buying demand we’ve seen as a result of a strengthening economy.”
In Redfin’s recent Housing Predictions for 2017, 30-year fixed rates were forecast to go no higher than 4.3%. Why? As long as the government is backing a large number of mortgage securities, there is a constant supply of credit to fund America’s mortgages, and more supply means lower rates.

Dec 15 Historical

So, for homebuyers on the market now or in the spring, the news isn’t as dire as it may seem on first blush. And, remember, rates are still historically very low – in the 1980s, they were rarely below 10 percent.


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