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.
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