By Douglas Katz – 06/13/2022
The Federal Reserve meets on 6/15 and it is widely expected that they will raise rates. Jerome Powell has consistently been communicating more aggressive actions meant to stem inflation, which is at a decades high 8.6%. Based on this, it would not be crazy for the Fed to bump rates up an addition 0.5%. Before discussing what this means to mortgages, you must always remember that there will not be a direct 0.5% increase in mortgage rates if the Fed does raise rates. Short-term rates will definitely see sharper movement, but longer term rates will see more gradual bumps based on historical experience. This does not mean potential homebuyers and homeowners looking to refinance should disregard the impact of the increase.
- CURRENT HOMEOWNERS – If you did not refinance already you likely missed the boat and should stay put. The exception would be homeowners who have Home Equity Lines of Credit (HELOCS) or those who anticipate a need for tapping equity in the future.
- HELOCs will move directly with the Fed Funds Rate, so 0.5% increase by the Fed will hit HELOC holders hard. While rates are not at the lowest in recent history they are still historically low. With future rate hikes a possibility, HELOC holders need to do some worst case analysis to where the HELOC payment will be too high and if it makes sense to consolidate while rates are relatively low and home prices are still strong. Remember, a refinance WILL be dependent on home valuation and if we see a drop, a consolidation refinance may become impossible. Also, other payments such as credit cards and car loans will increase and need to be factored into any analysis as the impact of a rate increase goes beyond the home financing. This is a good time to call a lender and have them help as advice is generally free.
- HOMEOWNERS EXPECTING TO NEED EQUITY – Much like the aforementioned HELOC holders, homeowners expecting to need equity should be worst casing their scenario. Waiting until the specific need manifests means being subject to rates at that time which are expected to be higher than today. I recommend anyone in this situation ignore the past rates environment as those rates are gone. They need to do the analysis of what rate increases will cost them in the future if they wait. This is about the best option TODAY not about mourning missing an opportunity. Also, like HELOC holders, this group needs to remember that their home values impact their potential deals for rates and terms. Also, as with the other example, other payments such as credit cards and car loans will increase and need to be factored into any analysis as the impact of a rate increase goes beyond the home financing. Again when in doubt, engage a professional!
- PROSPECTIVE HOMEOWNERS – This group is all about capabilities’ matching expectations. Increased rates will mean two main things for pre-approved borrowers. First and foremost, everyone except the most wealthy are losing purchasing power. This could be from the loan approval perspective or from choice regarding personal budget, but generally buyers will be able to afford less. Secondly, the result of the lower purchasing power will mean less buyers. A lower supply of buyers should mean lower prices. In this unprecedented market, we will not see a shift to a buyer’s market but we may see more motivated and flexible sellers. Any time there is this much volatility and an event like a Fed rate increase, pre-approved buyers should review and update their assumptions with the realtor and lender. If they are causal buyers who are looking at homes through real estate portals, they should immediately engage a lender to start working with real numbers.
- DIVORCING HOMEOWNERS – This group is actually an aggregate of the two above scenarios, In a divorce, there are generally either equity buyouts as a refinance, purchases of a new residence or both. All of the previous considerations need to become part of deciding on a best course of action, but these scenarios also have the complexity of the split, new financial profiles for both spouses and loan approval guidelines and regulations that lack the flexibility for a rapid course correction. Regardless of whether you are considering a divorce or in the midst of negotiations, divorcing homeowners should engage the help of a professional, preferably a subject matter expert like a Certified Divorce Lending Professional (CDLP) to get on track with an actionable plan. Too many times in divorce situations, people wait and the outcomes end up suboptimal or even catastrophic.
A lot of this is pretty intuitive, but people forget or are distracted with other factors and through omission or commission fail to adjust expectations to reality. In my recent post, The Housing Affordability Crisis and Why It Matters in Divorce, I discuss the cognitive and confirmation bias that affects people looking to finance a home. This does not change when there are major changes to a variable that is important to their decisions. It becomes more important. Remember, inaction is a choice, but in a time of heavy volatility it can often be the wrong one.