Planning to refinance or buy a home? Here's what you'll need to know.
Mortgage rates have spiked 0.5 percent since the U.S. presidential election earlier this month. On a 30-year fixed loan of $300,000, this increases your monthly payment by $85.
If you were waiting to refinance, this is a wake up call, and if you plan to buy a home, its time to reevaluate your budget because rates are unlikely to drop.
Lets review what happened, and where we go from here.
Rates rose after Donald Trump became president-elect because market participants believe his proposed policies infrastructure spending, tax cuts, and trade tariffs will be inflationary if enacted.
Rates are tied to bonds, because bonds pay a rate of return to investors each year. If policymaking fuels inflation, a bond investors rate of return will be worth less in the future. Investors sell bonds on inflation fears, and rates rise when bond prices drop in a selloff.
This is exactly what has happened. Since the election, bond selling has led to the biggest bond losses in 26 years.
Thirty-year mortgages have jumped into the low 4-percent range from the mid 3-percent range at record speed.
This dramatic rate spike might level off near-term, but dont count on a reversal back to record lows.
Jeffrey Gundlach, one of the worlds most respected bond investors, thinks weve seen about 80 percent of a post election rate spike ahead of the Federal Reserve meeting on December 14.
This means rates could rise a bit more in the coming weeks, then the next catalyst will be Fed policy. The Fed has two main policy influences on rates.
First, they control an overnight bank-to-bank lending rate that serves as a benchmark for overall rate levels in the economy. In December 2015, they hiked this rate 0.25 percent after keeping it near zero since December 2008, when the financial crisis was at its worst.
Theres almost 100% probability of a rate hike at the Feds December 14 policy meeting. If the Fed does hike, this will reinforce inflationary expectations, driving higher rates. It will also increase rates on home equity line of credit (HELOC) second mortgages.
Second, the Fed has helped to keep rates low since January 2009 by buying bonds that directly impact mortgage rates rates have dropped (or stayed low) on this Fed buying. Rising rates will hurt the Feds ability to buy enough bonds to continue holding rates down.
All of this means the Fed wont be as rate-friendly as weve become accustomed to since 2008. This is why its very unlikely rates will drop from here, and may rise instead.
Nobody knows how much more until we get policy clarity from the first 100 days of a Trump administration, and the corresponding Fed reactions February 1, March 15, and May 3.
Below are some things you should be aware of as you evaluate your options in a rising rate environment. These predictions incorporate the latest available economic estimates (from November 16) from the Mortgage Bankers Association.
BY JULIAN HEBRON ON 23 NOV 2016