The Federal Reserve’s rate change announcement on March 15 will affect local home owners in a variety of ways.
This much-talked about move affects short-term lending with terms of 10 years or less. Examples of the types of loans that are often tied to the prime rate are home equity lines and credit cards.
“With this increase being the third consecutive rate change, we’re seeing increased interest in cash-out refinancing,” said Herb Pettit, president of the Mortgage Bankers Association. “This allows a home owner to consolidate debt and lock their interest rate for up to 30 years versus allowing costs of borrowing to continue to climb.”
Don’t misunderstand: mortgage interest rates and the related costs of borrowing did increase in anticipation of the Federal Reserve announcement. For example, one week prior to the announcement, FHA and VA 30-year rates were sitting at 4.1 percent; on the day before the announcement, rates were at 4.2 percent. On the Monday following the announcement, rates had dropped to four percent.
The actual prime rates moved up a quarter of a point from .75 percent to one percent during this time, so as you can see, there’s no direct relation between the Fed’s prime rate and mortgage interest rates.
A key number to watch that does play a more direct role in mortgage interest rates can be found in the stock market. When the stock market is strong, investors flow more money in this direction verses placing money in Mortgage-Backed Securities (MBS).
A MBS is a type of asset-backed security that is secured by a mortgage or group of mortgages. The mortgages are sold to an entity, such as an investment bank, that securitizes, or packages, the loans together into a security investors can buy. Due to the recent strength in the stock market, Mortgage-Backed Securities must deliver a higher return to attract investor’s money; thus, the higher mortgage rates.
So, if you’re considering buying a home or refinancing in the next year or two, now is the time to act. An experienced Realtor can refer you to a LOCAL loan originator who can help you decide the best loan type for you and what you’re comfortable spending. Remember: as the rates go up, the amount of home you can afford goes down.
The Greater Chattanooga Association of REALTORS is The Voice of Real Estate in Greater Chattanooga. The Association is a regional organization with more than 1,700 members and is one of more than 1,400 local boards and associations of Realtors nationwide that comprise the National Association of Realtors.
GCAR services Hamilton and Sequatchie counties in southeast Tennessee, and Catoosa, Dade and Walker counties in northwest Georgia. Go to www.GCAR.net for more information.