Janet Yellen, the new Federal Reserve chair, walked into her first meeting with an important Fed committee early in 2014. There was much speculation about the outcome of this gathering, as Yellen’s summit with the Federal Open Market Committee (FOMC) would influence the direction of interest rates. As predicted, Yellen said the Fed will likely continue to reduce their purchases of U.S. treasury bonds and mortgage-backed securities.
What does this mean for mortgage interest rates?
The Fed’s bond purchase program (called quantitative easing) is credited with helping to keep interest rates at historically low levels since the 2007-2008 recession, with the intention of encouraging buyers and consequently stimulating the housing market. Some experts believe reducing quantitative easing may create upward pressure on interest rates.
Former Fed chair Ben Bernanke worried that an increase in rates might slow economic recovery, so the reduction of bond purchases may be an indicator that experts believe the economy is improving. It might also be a response to concerns about inflation. Either way, interest rates could rise.
End of an era?
This low-interest environment has been great for home buyers, many of whom have been able to lock in historically low mortgage rates. If interest rates begin to creep upward again, it could signal the beginning of a new chapter for the real estate market.
However, some say that the Fed’s action doesn’t necessarily mean that interest rates will rise. According to Yellen, the rate will remain low until the economy is clearly recovering; this statement has helped to suppress rates.
What Can You Do?
Mortgage rate increase will have an impact on the financial aspect of your life. But the good news is, you can do something to withstand the effects of the rising mortgage rates. Here are some steps that can guide you in case of a mortgage rate increase.
- Know Your Mortgage – There are different types of mortgage and the impact of mortgage rate increase will also depend on the mortgage that you’re on. If you are clueless, you can refer to your papers or seek the help of a mortgage specialist to find out.
- Work Out a Budget – An impending increase in mortgage rate will most likely affect your expenses and you need to set out a plan to identify the areas that you can cut back on. This will give you ample time to save so you can afford the added expenses when mortgage rates increase.
- Pay Extra for Your Mortgage – You should take advantage of the time before the increase in mortgage rates as this offers lower rates. During this period, you can overpay your mortgage to reduce your loan before the hike hits. However, you should verify with your mortgage provider to be sure that paying your mortgage earlier won’t come with additional charges.
What can you expect?
- Interest rates are unlikely to return to the historic lows seen from 2012 to early 2013.
- Experts predict mortgage rates will continue to creep upward.
- Rates on conforming mortgages will not spike, but rather move up gradually.
Are you prepared?
This market change makes it an opportune time to review your mortgage. A Carlyle Financial home loan expert can help you understand how interest rate changes could affect you and help you to review your options.