June 13, 2018.
On June 13, 2018, the Federal Reserve raised its benchmark interest rate above the rate of inflation for the first time in 10 years. The Federal Reserve forecasted three short-term interest rate increases for 2018, with the first interest rate increase for the year taking place on March 21, 2018, and rising 25 basis points from 1.50 to 1.75 percent. Today’s decision increased the rate 25 basis points from 1.75 to 2 percent. Now, with the possibility of more rate increases within the year, loan officers have an important warning for anyone looking to buy a house.
When the Federal Reserve’s target interest rate increases, short-term interest rates for credit cards and car loans are impacted directly, and mortgage rates are impacted indirectly. You can read more about how the March 2018 Federal Reserve interest rate increase affected homebuyers and owners here and find a breakdown of how the December 2017 Fed rate hike may have impacted your monthly bills here. You can also read The Wall Street Journal live analysis of today’s rate hike here.
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Why did rates increase for the second time this year?
It’s a common question with a fairly straightforward answer.
The Federal Reserve, more formally known as The Federal Reserve Bank, predicted three (and now possibly four) rate increases for 2018 because:
- The economy is looking stronger.
- Increasing the cost of borrowing, a.k.a. the interest rate, is a move the Fed uses to potentially push the economy forward. Lowering the rate helps a sluggish economy by allowing consumers to borrow more affordably. Raising the rate, as we are seeing today, has the opposite effect. It puts the brakes on the economy to curb or pace inflation.
- The Federal Reserve raises rates gradually when it believes consumers are ready and the economic outlook is more positive. We’re currently seeing one of the longest periods of continued economic growth in U.S. history — closing in on nearly a decade — and the Fed is working to control inflation without hindering economic growth.
Whenever a significant economic change like this occurs, consumers, and especially homebuyers and homeowners, have questions. Thankfully, loan officers have answers. Heeding these helpful hints could make all the difference if you’re thinking about buying a house this year.
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4 homebuying mistakes to avoid after the rate hike (and what to do instead)
A second interest rate increase doesn’t mean your dreams of homeownership — including selling and buying a new house — can’t come true this year. But for a better outcome, loan officers suggest avoiding these pitfalls when you buy:
1. DON’T skip your homework.
Are you really ready to buy? There’s only one way to find out. Get your financials in order, meet with a lender, and get prequalified first. Getting prequalified for a mortgage only takes about 15 minutes and can easily be done in person or online using our free app.* To anyone thinking about buying a house this year, Scott Cummins at Cornerstone Home Lending, Inc., says, “See if you’re ready to take that next step. The only mistake you can make is to not do anything.”
Getting prequalified for a mortgage may seem optional, but it becomes vital in a competitive market. “One powerful partnership in the house-buying adventure can be found between a buyer and their lender,” Cummins says. The right loan officer will not only help you get prequalified. They’ll educate you on how to place yourself in the strongest negotiating position possible.
For Lori Richardson, Vice President at Cornerstone, this means going the extra mile to get her clients fully conditionally approved. A conditional approval takes prequalification another step further and allows a buyer to communicate the strongest possible outcome of certainty in their mortgage prequalification to a listing agent. “With a conditional approval, all the heavy lifting on the loan has been done to ultimately get our client’s contract accepted!” Richardson says.
2. DON’T get frustrated by low housing inventory.
Depending on where you live, and depending on how much house you find out you can afford after getting prequalified, you might not see as many homes listed in your price range. In most parts of the U.S., the housing market has definitely tightened up, Cummins says. “Lower than average inventory is putting pressure on buyers to make full-price offers and have their ducks in order. In addition, fewer homes are coming on the market in the starter range as builders and sellers in the move-up market are finding that price point to be more of a sweet spot,” he explains.
In Richardson’s home state of Colorado, she and her team have seen a similar effect on inventory. She says, “The housing market is continuing to show strong buyer activity, and the market is very active. Low inventory, especially in the most active price points, and high competition, are factors for buyers. But we’re also seeing an increase in listings coming into the spring/summer buying season, which is great!”
With interest rates also on the rise, loan officers say this steady march northward has been expected. In short, loan officers aren’t surprised. Even better, they’re equipped to handle borrower questions about navigating a complicated market. Richardson says she discusses rising rates daily with her clients, taking care to put the rate increases in context. “First, rising rates are actually a good sign overall. They’re an indicator of a stronger, healthier economy, which is good for us all. Second, we try to help our clients keep things in perspective to alleviate the fear created by the media. The truth is that, compared to historic averages, we are still in great shape.”
Richardson reminds her clients that in the year 2000, the average mortgage rate was 8.1 percent. While experts predict more Fed rate hikes this year that may trigger mortgage rate increases, mortgage rates are still in historically low territory, hovering above 4 percent.
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3. DON’T be afraid to ask questions.
There’s no such thing as a stupid question. Especially when you’re preparing to make one of the biggest investments of your life. Fortunately, a loan officer is there to answer a multitude of borrower questions, ranging from the simple to the complex, daily. With amped-up competition and the pressure placed on the first-time buyer facing lower starter home inventory, Cummins says a skilled loan officer well-versed in various loan products and with a sense for where rates are heading can make all the difference.
Asking your loan officer about loan program qualifications, down payment assistance, and even buying in a new part of town could put you in touch with an affordable loan option you hadn’t yet considered. For example, USDA home loans require no minimum down payment and include rural and many suburban areas. Different down payment assistance programs are also available in different regions. Some grants don’t have to be paid back if you plan to stay in your home for five years or longer.
“The right lender and loan officer will take the time to really understand their clients’ goals,” Richardson says. “Our goal with each client is to help them integrate their loan into the rest of their plan to be able to move from the life they have to the life they dream about.”
4. DON’T put off buying.
The potential for tight housing inventory is one reason many loan officers are urging interested buyers not to wait. After getting prequalified (and conditionally approved) and checking in with your loan officer, you’ll have enough information to decide if it’s really the right time to buy. Cummins explains, “Buyers who thought they were not quite ready may get the fiscal confidence needed to make an offer and lock in at today’s current house prices and mortgage rates.” Cummins says buying a house before the next rate hike could even help buyers avoid the inevitable cost increase in the future.
A loan officer can also help a borrower find the right house in their price range. “Having the right lender and loan officer is vital at any time. But especially in a highly active and competitive market,” Richardson says.
Working with a loan officer who feels like a friend can make buying a house easy. Cornerstone loan officers go the extra mile by offering 15-minute mortgage prequalifications, multiple loan programs for all income levels, and a free mortgage loan credit report to help you get a better rate.* Click here to connect with a Cornerstone loan officer now.
*During normal business hours.
For educational purposes only. Please contact a qualified professional for specific guidance.
Sources deemed reliable but not guaranteed.