If I only had a crystal ball! It’s something I say every day when discussing interest rates with clients.
If I could predict what the future holds when it comes to stocks and bonds, and ultimately mortgage interest rates, I would be lounging on a beach in Fiji right now instead of cuddling up to the space heater with a strong cup of coffee. Despite my lack of psychic abilities, it is a major part of my job to be a trusted advisor to my clients and ensure they get the best possible loan that meets their long and short-term financial goals. Whether their dream home finally came on the market, or they just want to tap into their equity to make some home improvements, interest rates will play a major role in what is possible as far as affordability for the average homebuyer.
How do we know what interest rates will do? First, we can look at where they’ve been. Second, we can look at the driving forces behind them and then try to make some predictions. So, what happened with interest rates in 2018? Rates rose for most of the year and ended the year .375-.5 percent higher than they were the year before. Since the economic downturn, the Federal Reserve has been a big purchaser of mortgage bonds; this was termed “quantitative easing.” This pushed mortgage rates artificially low. This has helped our economy grow because it has promoted increased investment and lending. In 2018 their purchasing stopped, which along with other economic factors, greatly impacted mortgage interest rates.
The Federal Reserve has also kept the Fed Funds Rate (the rate at which banks borrow money) relatively low, but during 2018 they embarked on four “rate hikes” which ultimately made it more expensive for banks to borrow and lend money. What we know about the Fed’s plan for 2019 is to slow growth and combat inflation. One tactic at their disposal is to no longer buy mortgage bonds, so the supplemental “propping up” of mortgage rates that we’ve enjoyed since the Recession has gone away. Mortgage rates are based on the mortgage bond market. It is an open market (similar to the stock market) and fluctuates daily based on economic reports and mortgage bond purchases and sales.
We are through the first quarter of 2019 and we’re taking advantage of excellent interest rates, but our sources say we can expect them to increase to about a half to three quarters of a percent on average for 2019. That seems high for those of us with a short-term memory. In reality, mortgage rates are very near historical lows. That doesn’t mean they don’t have an impact on purchasing power though. A small increase in rates can change qualifying amount and therefore required income to qualify for that loan. If you’re like a lot of people in Routt County and decided to put your housing search off last year because of lack of inventory, be careful. The waiting game can be dangerous because of the interest rate increase risk.
Routt County is special for a lot of reasons: the mountains, the people and the weather to name a few. When it comes to mortgage financing we’re a little different than your average big city as well. We have a lot of second-home owners, a lot of condos and a lot of rental properties. We’re also categorized as a “resort area” by Fannie Mae and Freddie Mac. This means that your neighbor’s interest rate might look very different than your own, since rates are determined by a multitude of factors. A few examples are property type, down payment, credit score and occupancy. Therefore, the rate you receive putting 20 percent down on a house might be better or worse than your neighbor’s rate, even if they only put 5 percent down. Rates are determined by about 30 factors, so it is difficult to compare one person’s rate to another. Also, as we discussed earlier, rates change over time. In fact, they change every day based on the mortgage bond market.
What can we do moving forward? In 2019, we can do more than just sit back and watch rates rise. My number one piece of advice is to get your financial house in order by meeting with a mortgage professional before you find the perfect property. I love to meet with clients months, or even years, before they think they’ll be buying a home. In a competitive market with low inventory, like we have here in Northwest Colorado, it is important to be ready. You never know when the top floor condo with granite upgrades or the single family with a yard and a view will pop up for sale and you’ll want to act fast. It can mean the difference between 4.75 or 5 percent and thousands of dollars in affordability. Being poised to lock in your rate at the right time can help us smooth out a rocky economic outlook and make all the difference when it counts the most.
Area Sales Manager
NMLS ID# 223884
Equal Housing Lender. This is not a commitment to lend or extend credit. Restrictions may apply. Rates may not be available at time of application. Information and/or data are subject to change without notice. All loans are subject to credit approval. Not all loans or products are available in all states. Bay Equity LLC, 28 Liberty Ship Way Suite 2800, Sausalito, CA 94965; NMLS ID#76988. Colorado Mortgage Company Registration #76988. Regulated by the Division of Real Estate. NMLS consumer access: www.nmlsconsumeraccess.org BECH-190304-3.0