Mortgage Rates Are Rising, Now What?

While analysts debate how the federal funds rate increase will impact the housing market, there’s little question about how it will affect people who already have adjustable rate mortgages and Home Equity Lines of Credit (HELOC). If your clients are concerned about the uncertainty of their variable-rate loans, learn why they might want to consider moving to fixed-rate alternatives.

How Mortgage Rates Impact HELOCs

HELOC loans come with variable interest rates that include a benchmark or prime rate based on the federal funds rate. This means HELOC loans become more expensive any time the Federal Reserve decides to hike its benchmark federal funds rate.

Many people have spent the last ten years making nice, easy payments without understanding how drastically their payments could go up. Unfortunately, a lot of these borrowers never bothered to alter their HELOCs to lock in rates, because the interest rates hadn’t changed all that much during this period. Now, these people can expect higher monthly bills, especially since the Federal Reserve predicts three more rate increases in the coming year.

For some people with interest-only HELOCs, rate increases might not be that devastating, regardless of the chosen payment option. For others, fluctuating monthly payments could mean less money for other things, such as saving for retirement or paying bills. For those who are worried about the uncertainty of a variable-rate HELOC, it can help to lock in a fixed rate for the unused balance of their credit lines. They can also refinance their HELOCs and first mortgages into a new loan.

The Impact on ARMs

While they offer more rate and payment security, fixed-rate mortgages tend to be pricier than adjustable-rate mortgages, which often come with a tempting low initial cost. Unfortunately, just like HELOCs, ARMs are tied to the federal funds rate. This means they will become more expensive in the coming months.

At the same time, while adjustable mortgage rates are set to rise, it’s likely to take some time before homeowners see substantial increases in their 30-year home loan interest rates. Since the federal funds rate has been near zero for so long, the recent hike effectively put an end to a zero-interest-rate environment. While this appears to mark the end of historically low mortgage rates, it is unlikely to lead to unwieldy monthly payment increases, at least in the near future.

That said, if the Federal Reserve continues to increase rates over the next two to three years, mortgage rates will begin rising significantly – especially if inflation climbs. For long-term borrowers, it’s important to understand that even incremental rate increases can prove very costly on big-ticket purchases such as homes, which require loans that are stretched over many years.

Locking in Rates

By getting ahead of the rising tide, homeowners can save thousands of dollars over the life of a loan. If your clients have home equity lines of credit or adjustable-rate mortgages, consider recommending that they evaluate financing options that will allow them to move to low fixed-rate alternatives.