December 17, 2015
Homebuyer’s Guide to Rate Hike
U.S. News & World Report quoted me in A Consumer’s Guide to the Fed Interest Rate Hike. It opens,
The era of cheap money isn’t exactly over, but on Wednesday, after seven years of having near zero interest rates, the Federal Reserve voted to raise the central bank’s benchmark interest rate from a range of 0 percent to 0.25 percent to a range of 0.25 percent to 0.5 percent. Economists have largely seen this as a positive development – it means the American economy is considered strong enough to handle higher interest rates – but, of course, the all-important question on everyone’s minds is likely: What does this mean for me?
It depends, of course, on where you’re putting your money these days.
Homebuying. While it’s expected that the minor interest rate hike will result in it being more costly to borrow money to buy a home, that isn’t necessarily the case. Numerous factors influence mortgage rates, from where in the country your home is located to the state of the global economy to whether inflation is believed to be around the corner. Still, there’s a pretty fair chance that the interest rate hike will lead to higher borrowing costs.
But it’s worth remembering that even if the rates go up, it’s still cheap to buy a house compared to the recent past. According to Freddie Mac’s website, the average 30-year fixed-rate mortgage currently stands at 3.94 percent. If you bought a house, say, 15 years ago, the annual average rate in 2000 was 8.05 percent.
David Reiss, a law professor at Brooklyn Law School who specializes in real estate, says he wouldn’t rush out to buy a home based on the Fed’s announcement.
“I would caution strongly against letting the Fed’s actions on the interest rate influence the home-buying decision all that much, no matter what market you live in,” Reiss says. “First of all, the mortgage market has taken the Fed’s likely actions into account already, so interest rates … incorporate some of the rise in rate already.”
Bottom line, he says: “Generally, people should be buying a home when it makes sense for their lifestyle. Expect to stay put for a while? Maybe you should buy a home. Expecting kids? Maybe you should buy a home. Retiring to a warmer clime? Maybe you should buy a home.”
Again, the interest rate climbed 0.25 percent, and while the Fed has indicated that rates may continue to rise, Federal Reserve Chair Janet Yellen has stressed that any future hikes will be gradual.
“Small changes in interest rates do not generally make that much of a dollars-and-cents difference in the decision to buy,” Reiss says.| Permalink