Many of us are uncertain about how to allocate investments to maximize our money. For most of us, the bulk of our money is tied up in our homes, and any change in the prime rate brings with it one major question: Is it time for me to refinance? Unfortunately, any time macroeconomics dominates the national news, it's difficult to find experts who can agree on what's going to happen and even more difficult to understand what they have to say. That's why we're here. We'll do our best to explain what might happen, what it means for you, and help you figure out whether or not it's time to refinance.
Question: Why would the Fed raise the prime rate?
Answer: While it's impossible to guess all of the factors the Fed looks at when it makes a decision, a good indication that rates might go up is the fact that rates haven't gone up since the Bush administration. Interest rates aren't supposed to be this low for this long. When interest rates are low, Americans are punished for saving and encouraged to spend, often racking up incredible debt. Between credit cards, college tuition, and similar factors, the Fed might want to rein in all of this spending.
Question: OK, then why wouldn't the Fed raise the prime rate?
Answer: There are a lot of really odd factors occurring in the global economy right now, and oddness makes for uncertainty, which increases risk, which causes economists to perspire. Chief among the factors that might lead to an increase in the prime rate is the rapid rise in the value of the dollar, which hurts exports, particularly because the dollar is strengthening against the currencies of two of America's largest trading partners: China and Europe. Raising the prime interest rate makes Americans more likely to save their money, which takes dollars out of the market and raises the price of the dollar even further. This exacerbates the trade deficit by making importing products cheaper and exporting them more expensive. An interest rate hike also makes it harder for businesses to expand, since they will have to pay more for their loans, and hits average Americans in two sensitive areas: their mortgages and their credit card debt.
Question: How would a rate hike affect my mortgage?
Answer: A rate hike can only have one of two effects on your mortgage: It can raise your payments or do nothing. The only way a rate hike won't raise your payments is if you have a fixed-rate mortgage; otherwise, your monthly payment is going to go up.
Question: How can I keep my mortgage bill from going up?
Answer: If you don't want to start paying more every month for the house you already have, consider refinancing into a fixed-rate mortgage before the Fed raises interest rates, whether that's next month, next year or both.
Question: I already have a fixed-rate mortgage. Is there any reason to refinance my home?
Answer: If you were planning on refinancing at any point during the life of your mortgage, now is a great time to do it (and perhaps the best possible time to do it). Once the prime rate goes up, you won't be able to get as favorable a rate on your next loan as you would now, even if you're moving from fixed rate to fixed rate. If you want to get out of your old loan and into a new one, act before the Fed does, whenever that turns out to be.
Question: Should I buy points? Does the prime rate affect the price of points?
Answer: The Fed won't change the price of points on your mortgage, just the starting point for your rate before you buy any. Whether you should buy points depends on a lot of different factors, and your best plan is to talk directly to a specialist at Pen Air to figure out what's right for you.
But a rate hike decreases the value of points. If you were going to buy those points with cash, the value of money in your savings account will go up if the Fed increases rates. If you were going to use some of the equity from your original loan, you might be better off putting it toward variable-rate loans, like the balance on your credit cards.
The Fed will eventually raise rates. So, it could be worth tens of thousands of dollars to refinance your home now. If you still have questions you can call us at 850.505.3200 ext 8360 or visit penair.org/Mortgage for more information regarding our current Mortgage promotion.