How The Federal Reserve and Others Are Affecting Mortgages

uncertain-mortgageHomeowners and potential buyers need to educate themselves with interest rates, the bond market, and mortgage rates. Those considering how their mortgage options may change should pay close attention to the bond market and changes in Federal interest rates. Assessing and analyzing these factors will help determine what potential buyers and refinancers can expect.

With a recent rate increase from the Federal Reserve, many are feeling especially worried about the effect this change will have on the bond market. Bonds are directly impacted by changes in interest rates, but it remains to be seen exactly what the resulting effects will be.

The Federal Reserve

The Federal Reserve recently announced that they will no longer keep rates lowered to stimulate the economy. Most media outlets have been focusing on the effect this has had on the stock market already; as soon as Federal Reserve Chairman Ben Bernanke made the announcement the Dow and other major stocks took heavy hits. Some are criticizing the Fed for making this decision, saying they are cutting the assistive rates too soon, but the Fed has faith that the economy can now handle this. The stock market is not the only important factor. In truth, the bond market is most deeply affected by this change.

The Bond Market

The Bond Market, which is often referred to as the fixed-income or credit market, is intimately connected to interest rates. Interest rates set by the Federal Reserve directly affects what kind of growth bonds have, and directly affects rates for mortgages and other lines of credit. The bond market looks to be quite skeptical about these recent changes.

Mortgage Rates

In recent months, interest rates for mortgages have been incredibly low and this has caused many homeowners to consider financing their homes. In the past 10 years, the market has seen lower rates and many people have already refinanced. Some wonder if refinancing is irresponsible, risky, or a financially great move. It can be hard to determine exactly what the best options are, so homeowners need to be careful and cautious about the process. After the Federal Reserve made their announcement on June 19th, mortgage interest rates hit a two-year high.

What Does this Mean for Home Buyers?

For recent home buyers, this means they have made a great buy in a fantastic market. For those who are currently shopping for homes or mortgage rates, this change means they should probably act fast. With this recent increase in average rates, and no reason to foresee lower rates in the near future, potential buyers should take advantage of rates that are still very, very low.

What Does this Mean for Home Owners Who Want to Refinance?

Once again, the overall message on interest rates is to act soon. However, those homeowners who are looking to refinance need to very carefully assess their unique situations before making any decisions. It is important to fully understand a mortgage - what is still owed, what has been paid, what the interest rate is, and whether it is fixed or adjustable.

If you are considering a refinance, take the following steps first:

  • Talk to your bank or credit union. Ask about their competitive rates and ask for a comprehensive report on your own mortgage.
  • Look around - a lot. Don't go with the first package you hear about, talk with other banks first. If you hear two similar offers, use that as leverage to try and get a better rate or more perks.
  • Watch out for ARM. Adjustable-rate mortgages often start at incredibly low rates, and for people with bad personal credit, the bank will sometimes try to recommend these deals. However, adjustable-rates can increase severely as time passes.
  • Ask how your equity will transfer. Make sure the money you have already paid into your home will transfer, and make sure you understand what that means.
  • Ask a lot of questions. When you go into the bank or credit union to talk about your mortgage, make sure you ask a lot of questions. Don't worry about using up their time. You need to really understand what you are doing before you refinance.

The critical lessons here are that mortgages change with the market, and those looking to purchase a home or refinance the home they already own need to be educated.

Michael Lancsek is a broker and the owner of an Outer Banks realty company.

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