Curve

Fed raises rates, calls for faster rate hikes in 2018

Gina Pogol
The Mortgage Reports editor

Federal Reserve: .25 percent rate increase

The Federal Reserve Bank’s Open Market Committee (FOMC) concluded its meeting today, and as expected, the Fed raised its target short-term interest rate by .25 percent to a range of  1.75 to 2 percent.

However, that information was already priced into current mortgage rates, because investors and lenders had long been anticipating this move. The Fed under former Chair Janet Yellen indicated that it expected to raise rates three times in 2018. Today’s increase was the second this year.

Verify your new rate (Dec 14th, 2018)

Look for a fourth increase in 2018

The Fed announcement indicated that it will raise interest rates two more time this year. That came as a surprise to many. But according to The Wall Street Journal earlier this year, 31 percent of investors were operating under the assumption that there would be a fourth increase in 2018.

An additional 8 percent believed that there would be five increases in 2018.

Related: June 2018 mortgage rate forecast

What the Fed said

The Federal Open Market Committee (FOMC) indicated that economic activity increased “at a solid rate.” This was a more hawkish tone than their their May statement, when they called the economic improvement “moderate.”

Today, Fed officials said they expect the economy to grow at a 2.8 percent rate this year, up from a 2.7 percent forecast in March. The FOMC now expects the unemployment rate to drop to 3.6 percent by the end of 2018, down from a forecast of 3.8 percent in March.

Why the additional increase?

The continued economic strengthening caused the Fed to project an additional rate increase for 2018. FOMC members also raised their headline inflation rate forecast for the year to 2.1 percent from 1.9 percent.

The Fed now believes inflation will run slightly higher than its target rate of 2 percent through 2020, at 2.1 percent each year.

Today’s increase was the second this year and the seventh since the end of the Great Recession. The last time rates topped 2 percent was in 2008, at the start of the Great Recession.

Just one vote

However, the fourth increase, if it happens, will be the result of a single vote in the FOMC changing to a more extreme stance on interest rates.

One vote could very well change this picture again at next month’s meeting, depending on the performance of the economy.

Related: Housing affordability crisis? Data says “no”

One wild card is the effect of the Trump tax cuts. Intended to stimulate the economy, they could end up causing it to overheat, fuel inflation, and actually diminish buying power.

On the other hand, the less aggressive FOMC members still believe in more modest hikes, or even holding today’s rate indefinitely. It really depends on what happens in global politics and the economy over the next month.

Action steps for mortgage shoppers

There is little to suggest that rates are headed any way but up over the next few years. If you have a fixed-rate loan today, congratulations. You are set.

Your future is not so predictable if your rate is adjustable or if you have not yet bought a home. If the hawks (more defensive policy makers) win out, your mortgage payments will go up, and your home buying power will go down.

Related: Home buyers not deterred by rising prices or mortgage rates

However, most believe that this process will be gradual. The Fed’s announcement reads:

“In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective.

“This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.”

What about ARM mortgage rates?

If you have an adjustable rate loan (ARM), you’ll need to get out your loan documents and do some calculating. When will it reset if rates are 1 percent, 2 percent, or 3 percent higher than they are now? Your loan should have caps that limit how much your mortgage rate can increase at any one reset or over its life. Would that rate be affordable?

Alternatively, did you get that loan while planning to sell your home before rate resets became a possibility? How is that timeline holding up? If you planned to sell this year but are now looking at three more years, consider a 3/1 ARM refinance before rates go higher.

Related: How ARM rates work: 3/1, 5/1, 7/1 and 10/1 mortgages

If you expect to be in your home indefinitely and have an ARM resetting soon, you have a couple of options. Accelerate your repayment so that there will be a lower balance to worry about when your rate rises, refinance to a new ARM now while rates are relatively affordable, refinance to a 15-year fixed loan (the rate should be about the same s the 5/1 ARM), or bite the bullet and refinance to a 30-year fixed loan while rates are still under 5 percent.

Home equity lines

When the Fed raises interest rates, the first and greatest effects are felt in short-term lending. That includes your credit card rates and variable home equity loan rates like you’d have with a HELOC. Many HELOCs come with convertibility features that allow you to lock in the rate of your current balance. Ask your lender if you have this feature.

Related: Convertible HELOCs let you fix your interest rate

Rate increase: Should you buy a new home ASAP?

The recent rate increase was actually very small and had little effect on long-term financing like mortgages. Don’t jump the gun if you are not otherwise ready to buy a home because the financial fallout could be worse than a small addition to your monthly payment.

However, if you’re sitting on the fence, it might be a good time to get off and get pre-approved for a home loan. And shopping intelligently for your loan and choosing the right mortgage could easily offset a relatively insignificant increase in rates.

Verify your new rate (Dec 14th, 2018)