PCS Resources

Here Come Rising Interest Rates

2022-04-04

Unfortunately, it’s not just in your imagination: We are paying more these days for gas, food, electricity, and groceries.

Consumer prices increased in January 2022 by 0.6%, following the same increase in December 2021. The cumulative effect has been the largest rise in inflation in the past 40 years, says the Bureau of Labor Statistics.

To head off rising inflation, the Federal Reserve has indicated it will start raising interest rates during 2022 and into 2023. Here’s why: When interest rates are low, as they have been in recent years, companies and people invest, borrow and spend more money more freely, which causes the economy to grow, but it may have a negative impact by causing inflation to increase. In addition, more government spending and borrowing can cause the value of the dollar to decrease, thereby adding to inflation. Conversely, when interest rates go up, companies and consumers tend to borrow and spend less, causing the economy to slow down and usually lowering the rate of inflation.

How much of a change can we expect the average of 4.67% (as of 4/5/22) for conventional mortgage rates to increase? "Housing experts and economist vary in their opinions and outlooks, but with recent changes in interest rates, we could see 30-year Fixed Rate mortgage in the 5-6% range before the end of the year," states Rob Greenbaum, Chief Marketing Officer at AAFMAA Mortgage Services LLC (AMS).

That would directly impact AAFMAA Members who are hoping to purchase a home, planning to refinance, or paying an existing mortgage which has an adjustable interest rate.

To understand more of what's ahead for Members, here are some questions we asked Mr. Greenbaum.

When we hear “the Fed is raising interest rates,” what does that mean and how does it affect mortgage interest rates?

Greenbaum: When people talk about the Fed raising interest rates, they’re referring to the federal funds rate, set by the Federal Open Market Committee (FOMC). This rate acts as a reference for the interest rates commercial banks charge each other, which, in turn, influences other types of interest rates, including mortgage interest rates, credit cards, personal loans, student loans, auto loans and business loans. In this case, we anticipate a tick up in the federal funds rate in March, following the Fed’s mid-month meeting, possibly followed by several other incremental rises during the remainder of 2022.

How would that affect Members planning to take out a mortgage?

Greenbaum: A higher interest rate means you’ll pay more each month and over the life of a loan. For instance, for a $300,000 mortgage with a 30-year, fixed interest rate at 3.5%, the total lifetime cost of the mortgage would be approximately $485,000, with nearly $185,000 going toward interest and monthly payments of about $1,340. But if that rate rises to 4.5%, over the 30-year life of the loan, the Member would pay more than $547,000, with interest charges accounting for $247,000 of that amount and a monthly mortgage payment of about $1,520. The higher interest rates coming may be an incentive for some to start the mortgage process now.

Will variable rate mortgages go up, too?

Greenbaum: The interest rate with adjustable-rate mortgages (ARMs) varies or adjusts to interest rates in the marketplace after a certain time period. For example, the initial interest rate may be fixed for one, two, or five years and then adjust after that. This is important because mortgage payment amounts are determined (mostly in part) by the interest rate on the loan. The payment may also vary by month if you escrow your property taxes and homeowners insurance. The higher the interest rate, the higher your monthly payment. Likewise, payments with an ARM may decrease if interest rates fall, although that’s not something expected by housing finance experts in the near-term.

Can I refinance my ARM to lock in a fixed-rate?

Greenbaum: Yes. Like other types of loans, you can refinance an ARM to replace your existing loan. By switching to a fixed-rate loan, you’ll know with more certainty what your mortgage payment will be from year to year. In addition to locking in a low fixed rate, refinancing can help you pay off your mortgage sooner, get cash out of your home, or consolidate debt. Our refinancing calculator can help you understand how much you may be able to save. However, your total finance charges may increase over the life of the loan.

But overall, now is a great time to refinance due to historically low mortgage rates, and before rates increase further. But the ideal timing for you to refinance depends on your financial goals and longer-term plans, and whether you can afford the closing costs.

What else should Members do to be ready?

Greenbaum: It’s always a good idea to check in with an AMS Military Mortgage Advisor to get an update on your mortgage options, to make sure you’re ready for the ups and downs of the housing and mortgage markets and changes in your own life, such as starting a family, moving to a larger home, or retiring.

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Here Come Rising Interest Rates

When we hear “the Fed is raising interest rates,” what does that mean and how does it affect mortgage interest rates?