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Act now to avoid the pain of a sharp interest-rate spike

By Jeff Lazerson

2/1/18

What I think: Say goodbye to very low, stable mortgage interest rates that you’ve enjoyed for the past six years. Say hello to a rapid fixed-rate climb and perhaps four Fed short-term interest rate hikes in 2018 (although the Federal Reserve didn’t raise rates Wednesday).

For much of the past six years, the 30-year fixed mortgage has averaged below 4 percent. Mortgage rates have jumped almost one-half point since September with some expecting rates to surpass 5 percent in the not too distant future.

Mortgage Bankers Chief Economist Mike Fratantoni sees 30-year fixed mortgage rates hitting 4.8 percent by the end of 2018 and 5.3 percent by the end of 2019.

“I see four short-term rate hikes in 2018 at the Fed meetings in March, June, September and December,” Fratantoni said.

Today, the prime rate is 4.5 percent. If we see four one-quarter point rate hikes this year, that will land the prime rate at 5.5 percent – a 10-year high.

Steven Thomas at ReportsOnHousing.com sees 5 percent mortgage rates weighing heavily.

“Once we eclipse 5 percent, the threshold of pain starts to change our marketplace,” said Thomas. “Locked into lower rates inhibits (homeowners) from selling. Appreciation will flat line.”

Can it get worse than rising interest rates due to inflationary pressures?

Citing Americans’ lowest savings rate of disposable income ever recorded at 2.4 percent and stock market equities currently at 150 percent of GDP, Michael Pento of Pento Portfolio Strategies sees a recession hitting in October.

So, caution flags ahead. Prepare now.

The first thing that comes to mind is the potential spike in home equity loan rates. Most homeowners’ HELOC’s have a margin added to the Wall Street prime rate.

For example, let’s say prime does go to 5.5 percent, and you have a 1.5 percent margin. That means your rate would rise to 7 percent, and you’ll see a sizable payment increase. Assuming your rate is currently at 6 percent and your interest-only payment on a $100,000 balance is $500. At 7 percent, your payment jumps more than 15 percent to $583.

The same holds true if you are carrying a balance on your credit cards.

Consider pulling cash-out on a first mortgage and rolling up your variable rate debt into a fixed rate. A close call on comparable payment savings today might become an easy call in hindsight one year from now.

While it’s counter-intuitive in nature, with points you can still get a seven-year adjustable rate purchase or refinance mortgage under 3 percent. That’s a full point lower than today’s fixed rate. Being locked down for the first seven years, perhaps it is enough time to ride out a possible economic storm ahead.

Last thing is, do not trust the banksters to be on your side if times get tough. Depositories don’t give prior notice when they freeze you out from borrowing against your HELOC.

If you need to take action, do it now.

If you have questions or comments, please contact Jeff Lazerson by clicking here. For more great insight make sure to check out Jeff Lazerson’s Mortgage Grader Radio Show on Sundays at 10 am on AM830 KLAA.