How Do Federal Reserve Interest Rate Hikes Affect Mortgage Loan Rates?
The Federal Reserve raised interest rates by .75% in June—its largest since 1994.1 These ongoing rate hikes ultimately impact mortgage loan rates—read our Q&A to find out what it could mean to you if you’re house hunting or considering refinancing.
Q: How Have the Fed’s Interest Rate Hikes Affected 30-Year Mortgage Loan Rates?
A: While the Fed doesn’t set mortgage rates, its actions impact the federal funds rate—or the overnight rate—that banks use to borrow and lend from one another. That said, the mortgage market’s efforts to interpret the Fed’s actions does affect how much you pay for your home loan. To that end, we saw the 30-year fixed mortgage rise to 5.5% as of July 1, 2022, up from 3.2% at the same time last year, so nearly doubling.2
Q: Does a Change in the Federal Funds Rate Affect Adjustable Rate Mortgages (ARMs)?
A: Yes because, unlike conventional fixed mortgage rates, ARMs have a floating interest rate that fluctuates with the market on a monthly basis.
Q: What Have Mortgage Rates Been Historically?
A: From April 1971 to April 2022, 30-year mortgage rates averaged 7.8%.3 The current 30-year rate is only modestly lower than it has been historically.
Q: Given Rising Interest Rates, Is Refinancing My Mortgage a Good Option?
A: It depends. The original interest rate, the proposed refinanced rate, closing costs and your current cash flow needs are factors in this decision. A rule of thumb is to think about refinancing if the refinance interest rate is 1% lower than your existing interest rate.
Alternatively, it could be worth considering doing a cash-out home refinance, depending on whether your home is worth significantly more than the amount you owe. There are specific rules regarding the deductibility of interest with a cash-out refinance and you are essentially starting over with paying principal and interest on a higher loan amount, so work with your wealth advisor to weigh the pros and cons to see if it’s right for you.
Q: How Might High-Net-Worth Individuals Benefit from Increased Mortgage Rates?
A: Higher mortgage interest rates decrease the purchasing power of potential buyers as home prices rise. As a result, high-net-worth individuals who can afford to pay above asking price for a new home would have a better chance than some at purchasing that home even in a short-supply, high-demand climate.
Also, rising mortgage rates might present attractive real estate investment opportunities for the more affluent. Because fewer would-be homeowners can qualify for mortgages, the demand for rental housing will likely grow, with rents rising in tandem. We recommend that you talk with your wealth advisor about whether owning a rental property makes sense for you.
Sources:
1“Latest Developments: Stocks Lose Steam After Fed Development”
2 Mortgage News Daily, 30-Year Fixed Mortgage Rates
The views expressed are for commentary purposes only and do not take into account any individual personal, financial, legal or tax considerations. As such, the information contained herein is not intended to be personal legal, investment or tax advice. Nothing herein should be relied upon as such, and there is no guarantee that any claims made will come to pass. The opinions are based on information and sources of information deemed to be reliable, but Mariner Wealth Advisors does not warrant the accuracy of the information.
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