When Interest Rates Rise
… many people fall out of the house buying market. This is a mistake. Many of the best mortgages deals become available when lenders are competing for new business and sellers are competing within a smaller buyer pool.
Soon interest rates will be at six percent and if you get a four and a half percent loan now it will be the best investment ever.
You just have to know how to keep the costs down in order to counter the effects of when interest rates rise.
One of the best tricks is the buy-down. In a buy-down, a fee is paid at the closing to get a lower interest rate. In a soft market, an anxious seller may be lured into paying all or part of the buy-down. Another approach is to get the seller to pay some of closing costs, thus lowering the amount of
cash a buyer needs to close. The buyer can frequently use the seller’s costs as a write…off. (Check with your tax adviser.)
There are also many types of lenders out there. I will cover those in my next article.
If the market is softening due to rising or higher rates, the price itself becomes an area where a buyer may be able to save a lot of money on a house through some hard negotiating. Lower prices mean lower loan amounts, so don’t be discouraged by higher rates–use them to your advantage.
I am seeing that some homes coming on the market this year have price tags that are $50,000. – $150,000. over market. Some Realtors are promising high sales prices to secure a listing. Those homes will languish on the market and sell for a lower price in about 60 days.
Things That Traditionally Increase When the Fed Increases Interest Rates
The recent rise in the Fed funds rate will likely cause a ripple effect on the borrowing costs for consumers and businesses that want to access credit based on the U.S. dollar. That has an impact across numerous credit categories, including the following:
The Prime Rate: A hike in the Feds rate immediately fueled a jump in the Prime rate, which represents the credit rate that banks extend to their most credit-worthy customers. This rate is the one on which other forms of consumer credit are based, as a higher prime rate means that banks will increase fixed, and variable-rate borrowing costs when assessing risk on less credit-worthy companies and consumers.
Credit Card Rates: Working off the prime rate, banks will determine how credit-worthy other individuals are based on their risk profile. Rates will be affected for credit cards and other loans as both require extensive risk-profiling of consumers seeking credit to make purchases.
Savings: Money market and credit-deposit (CD) rates increase due to the tick up of the prime rate. In theory, that should boost savings among consumers and businesses as they can generate a higher return on their savings.
Auto Loan Rates: Auto companies have benefited immensely from the Fed’s zero-interest-rate policy, but rising benchmark rates will have an incremental impact. Surprisingly, auto loans have not shifted much since the Federal Reserve’s announcement because they are long-term loans.
Mortgage Rates: A sign of a rate hike can send home borrowers rushing to close on a deal for a fixed loan rate on a new home. However, mortgage rates traditionally fluctuate more in tandem with the yield of domestic 10-year Treasury notes, which are largely affected by inflation rates. Currently, inflation levels remain low and recent, significant purchases of conservative vehicles like the 10-year in a high-risk market keep these yields down.
As always, I am available for a free consultation that will connect you with the right type of lender.