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The effects of an interest rate increase by the feds

There has been a lot of talk about interest rates in the last few weeks because we’ve seen a solid 1% jump over the course of a month. I figured we should find out from the experts as to what is going on and what we can expect moving forward. 

Matt Nader, Vice President of Bay Capital Mortgage, shares his take on the effects of an interest rate increase by the feds:

There is a misconceived notion that the Fed’s increase in the overnight discount rate has a direct correlation to long term mortgage rates, but this isn’t the case.  The overnight discount rate directly effects short term rates; such as credit cards, auto loans and home equity lines of credit.  However, mortgage rates have been increasing since the election.  The reason behind the increase in rate is due to the fact that the economy is starting to strengthen, therefore bond yields are increasing which is a direct correlation to mortgage rates.  Since the election, there has been a sell-off in the treasury market (bond market) and equities (stock market) have significantly increased.

What does this mean for next year?

Mortgage rates will most likely continue to increase throughout 2017 as long as the economy continues to strengthen.  Therefore – it is time to speak to a mortgage lender, figure out what you are qualified to purchase, more importantly figure out what price range you will be most comfortable in in regards to monthly obligation.  An increase in interest rate will skew your comfort level in regards to purchase price, meaning if rates increase you may have to lower your purchase price to keep your target monthly payment.

Matthew Nader
Vice President of Bay Capital Mortgage
The Matt Nader Group
http://themattnadergroup.com/

Posted on December 19, 2016 at 4:59 pm by Greg Brock

2 Comments

Jarrett Dunston on said: Reply

Hi Matt and Greg,

Thanks for the great article. As the mortgage interest rates increase, what effect do you think this will have on home values?

Also, what effect, if any, do you think it will have on the rental market?

I look forward to hearing from you.

Jarrett Dunston

    Greg Brock on said: Reply

    Hey Jarrett, Great questions!

    In the short term, this will actually give home values a small bump. As nervous buyers flood the market to try and get the best rate possible, we’ll see a small increase in values. But as the fear of interest rate doom calms down, the home values will have to adjust to meet the market’s needs. For example, if before the interest rate hike, a typical “move up” buyer could afford a $400,000 home, but now they are limited to $375,000, they are likely to wait out the market until the home that fits their needs adjusts to their new budget.

    It’s nearly impossible to say how much the market values will adjust. It’s absolutely dependent on where interest rates level out.

    As far as rental’s go, it’s not going to hurt rentals. Rental rates are only going to rise along with the demand for them.

    -Greg Brock

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