Many of my clients ask a lot of questions about interest rates for mortgage loans when they are shopping for houses. I have asked Todd Wiggins, a loan officer with First Community Mortgage in Brentwood, Tenn., to be my guest blogger today so he can answer some of your interest rate questions for 2016.
"I'm often asked about mortgage interest rates and where they are headed. Of course, if I knew the answer, I'd be on Wall Street (or Las Vegas) and not originating mortgage loans. However, even the "experts" can't predict where rates are going. Still, I subscribe to and follow mortgage market experts and share their knowledge with my clients to assist in their lock decisions. Here is some of what I'm hearing about mortgage rates in 2016.
First, let me dispel the myth that mortgage rates go up when the Fed increases their rate, as done in December. The Fed Funds Rate does not directly correlate with mortgage rates, and its influence on mortgage rates is marginal, at best. So what does this rate do? It is the target rate at which banks lend money to each other on an overnight basis. That rate has been near zero percent for around eight years. Why has it been so low? The over-simplified answer is that it's to stimulate the economy. The cheaper it is to borrow, the more likely we are to spend, which stimulates growth. However, a low Fed Funds Rate can lead to inflation and have other ill effects on our economy as a whole. The Fed has been watching inflation, unemployment numbers, and a myriad of other factors waiting for the right moment to increase the rate as they did in December. There has been much speculation as to further increases, however most recent forecasts I've heard project little to no increase in the Fed Funds Rate for the remainder of 2016.
So, if the Fed doesn't directly impact mortgage rates, what does? Rates are tied more directly to the bond market. As bond prices rise, mortgage rates tend to fall and vice versa. Generally speaking, a strong US economy will attract investors and risk-takers, making the more conservative bond market less attractive. This results in lower bond prices and higher mortgage rates. Conversely, an uncertain stock market can help bonds and mortgage rates. Bond markets are often influenced by events abroad. In today's world economy we are seeing our US markets impacted more frequently and directly from geopolitical events. Take a look at how China's devalued currency has affected our markets recently.
With so many factors influencing mortgage rates, one can see how difficult it is to predict their future. The experts I listen to are less optimistic about our U.S. economy than our administration, and they see potential issues abroad that could drive investors into the safe-haven bond market. While this is not likely to lead to a significant drop in mortgage rates and another refinance boom, it will likely help to maintain the current rate environment throughout the year.
I advise my clients that buying a home should not be predicated by interest rates but by the need or the opportunity. When it is time to consider that move, it is helpful, though, to have a mortgage advisor who has the resources to help you understand the market and to make the most of your dollar. While I can't predict the future, I can certainly help you understand and assess your present."
Todd Wiggins, Loan Officer
750 Old Hickory Blvd, Bldg One, Ste 262
Brentwood, TN 37027