Bethpage Federal Credit Union: How Homeowners Are Impacted by Rising Rates
NEW YORK, May 9, 2022 (Newswire.com) - In March, the US Federal Reserve raised interest rates for the first time since 2018. Rates increased by .25 percentage points, and the Fed anticipates six more rate hikes before the end of the year. With interest rates rising for the first time since before the pandemic, many homeowners are wondering how this will affect them.
How will interest rates affect mortgages?
Homeowners with fixed-rate mortgages (mortgages with a set rate that does not change during the life of the loan) will not see their interest rate change.
However, homeowners with adjustable-rate mortgages who are past their initial term will likely see their rate go up as the Fed rate rises.
Homeowners with fixed-rate mortgages looking to refinance, or those with variable-rate mortgages that want to convert to fixed rates, should take advantage of lower interest rates and act soon before rates rise even more.
How will rates affect homeowners looking to borrow against their mortgage?
Owners looking to borrow against their mortgage generally have two options: Home equity loans and home equity lines of credit (HELOCs).
Home equity loans, also called second mortgages, allow homeowners to borrow using the equity in their home as collateral. Home equity loans usually come with a fixed interest rate. Rates for new home equity loans will likely increase with rising federal interest rates, so homeowners looking to borrow against their mortgage should lock in a rate soon.
While home equity loans offer a lump sum, HELOCs allow homeowners to withdraw from an open line of credit based on the equity in their home. A HELOC works like a credit card, where borrowers can use money as needed during the draw period (usually 10 years). Some lenders allow borrowers to make interest-only payments toward the loan during the draw period. After the draw period, borrowers start repaying both the principal and interest. HELOC interest rates are most often variable rates, but some lenders are starting to offer fixed-rate HELOC options.
Homeowners applying for a HELOC should look for one with a fixed rate loan option in anticipation of rising interest rates, as variable rates will carry more risk in the current environment.
How will inflation affect homeowners?
Higher interest rates are meant to stabilize inflation, and stabler prices can help homeowners considering big purchases. Prices have gone up over the past two years, particularly for construction materials. Fortunately, slowing inflation may keep prices down and make home improvements more affordable. Slowing inflation also means homeowners taking a home equity loan or HELOC to pay for construction may be able to save money and borrow a smaller amount as they make their home improvements.
The bottom line
Rising federal interest rates will likely result in higher interest rates on consumer loans, including existing variable-interest mortgages, new home equity loans, and new HELOCs.
Anyone looking to get a loan or refinance should lock in a rate soon. While the cost of construction materials has increased with inflation, homeowners looking to make improvements on their homes could make their borrowing go further when inflation slows to bring these costs down.
Source: Bethpage Federal Credit Union