If you've been keeping an eye on the real estate market recently, you've probably heard a few rumours about rising interest rates flying around. We're sad to say that what you've been hearing is true — but that doesn't mean you should give up hope on your dreams of becoming a homeowner.
Keep reading to learn more about what's happening with interest rates today — and what you can do to stay competitive. While the mortgage industry is undergoing a change, it's entirely possible to keep up with the curve. All it takes is a little forethought and planning to make it happen.
Why Do Interest Rates Rise & Fall?
To give you a little context, the The Federal Open Market Committee (FMOC) is in charge of regulating interest rates based on the condition of the economy. They do this by fluctuating the Federal Funds Rate, or interest rate at which banks borrow money from each other. Banks do this on a daily basis in order to stay compliant with federal regulations regarding how much money they keep on hand — or in reserve — for their consumers.
When the economy is not doing well, the FMOC lowers the fed fund rate, which gives lending institutions more incentive to lend money to you since, if needed, they're easily able to borrow more. In turn, you loan allows you to make purchases, which stimulates the economy.
In times of economic prosperity, the FMOC will raise the fed fund rate, which makes it more expensive for banks to borrow the money that they need to stay compliant. They pass this cost onto the consumer by raising their rates, which slows down the economy and protects against over-inflation.
Why's It Happening Now?
Put simply, interest rates are rising because the economy seems to be doing well. In 2017, the fed fund rate was increased three times due to a declining unemployment rate, the growth of the stock market (until recently), and changes to the tax code that — whether or not it actually happens — promise to put money back in people's pockets.
Three additional hikes were projected for 2018, and this far, the FMOC seems to be holding to that goal. While mortgage interest rates have a tendency to rise slower than other types of debt like credit cards and home equity loans, there has been a shift. Right now, mortgage interest rates are hovering around 4.5%, which is the highest it's been since 2013.
The way things are going, it's reasonable to expect that they'll continue to climb.
What You Can Do
Many buyers are, understandably, discouraged by this news. However, it's important to understand that these rates are still fairly low, historically, and that raising them doesn't make it impossible to buy. You just have to be smart about it,
Here are a few tips on how you can try to play these changes to your advantage:
If You Can Buy, Do It ASAP
Since it looks like interest rates are going to continue can grow, those who have been thinking of buying may want to jump in while rates are still fairly low. Once you're under contract, most lenders will issue a rate lock for a certain period of time, meaning that as long as you close before their specified date, your interest rate will remain the same even if industry rates change.
If You're Fixing Your Finances, Pay Down Debt First
Yes, saving for a down payment is also important, but by focusing on paying down your debt first, you'll save yourself from incurring an extra burden from rising credit card interest.
When You're Ready, Look For Buyer Incentive Programs
Interest rates aren't the only factor that impact your ability to buy. Down payments and closing costs also play a role. However, many lenders offer incentive programs that help offset these costs for qualified buyers, especially first-timers. Be sure to research offerings in your area to see if you can receive any assistance.