With mortgage interest rates being as low as they have been over the past few years, plenty of homeowners have been jumping on the refinancing bandwagon to slash interest payments on their mortgages.
Since the housing crash in 2008, interest rates have been declining, and have been hovering around historic lows. The US Federal Reserve has since been keeping things rather conservative in an effort to bail the country out of crisis, and make financing more affordable for homeowners. As of August 16, the average interest rate on a 30-year fixed mortgage is approximately 3.37%.
The ground-breaking Brexit vote for Britain to leave the European Union has also had an effect on the US economy. But such an impact is not expected to last long, and should be showing signs of a weakening effect on the US in the near future.
The Federal Reserve is Anticipated to Increase Interest Rates
The extended low rates have stimulated a refinancing boom across the country, as homeowners have been capitalizing on this trend to save thousands of dollars over the term of their mortgages. Even a fraction of a percent shaved off mortgage rates can translate into sizeable savings.
But it seems as though the refinancing boom is showing signs of slowing, as rates are set to rise. The Fed has been positioned to increase rates since December 2015, and it seems as if that’s finally going to happen. Financial experts anticipate rates to increase before the end of the year. Any decisions that the Fed makes regarding funds rates will ultimately impact the mortgage bond market. This, in turn, will change mortgage interest rates for Americans.
The further mortgage interest rates rise, the smaller the window of opportunity to refinance at a significantly lower mortgage interest rate.
Improving Job Market
An improvement in the US job market is great news for the overall economy, but not necessarily for those who wish to refinance their mortgages. Generally speaking, the stronger the economy, the higher mortgage rates tend to be.
This past July showed a renewed strength in the job market, with 255,000 jobs added that month, as well as a 0.3% increase in wages from the month before. After such numbers were reported, mortgage rates immediately started to climb.
Individual mortgages that are packaged into mortgage bonds influence mortgage rates every day. Investors are paid out a rate of return from bonds every year, somewhat like a dividend payout on stocks. These rates have an inverse relationship to bond prices – as one drops, the other rises, and vice versa.
In the midst of strong economic news – such as the recently reported improving job market – bond prices tend to decrease, while rates increase. On the other hand, bad news on the economic front tends to cause bond prices to spike and rates to plummet. Considering the positive news we’ve recently been given about tens of thousands of new jobs created, it’s no wonder that rates increased as a result.
While the volume of refinances is still up almost 61% compared to the same time last year, total mortgage application volume – including both mortgage refinances and home purchases – declined 1.3%, according to the Mortgage Bankers Association. More specifically, refinance applications dropped 1% over the same time period.
If mortgage rates do continue to rise, the influx of homeowners rushing to refinance their mortgages will continue to slow down.
There’s Still Time to Refinance at Low Rates
Despite the refinancing boom losing steam, there’s still time to take advantage of today’s low rates before they start to rise. US mortgage rates tend to dip amidst uncertainty in markets outside the US. That’s exactly what happened earlier this year with concerns over the Brexit vote and a weakened economy in China, to name a few. Global economic uncertainty still looms today, so dips in mortgage rates can be expected.
The Fed has another meeting coming up next month, and again in November and December. Experts are anticipating that bank-to-bank lending rates could increase within this time frame, which will affect bond markets and mortgage rates.
It’s always wise to keep tabs on rates, as they are volatile lately and tend to fluctuate rapidly. Make sure to speak with your lender right away to see if a refinance is a viable option to save you money.