On December 16th, it is widely expected the Federal Reserve will pull the trigger on their first rate hike in 9 years. For now, let’s skip the analysis about the Fed’s motivations or future plans, and instead theorize the impact a .25% increase may have on key mortgage products:
Home Equity Lines of Credit (HELOC’s) – HELOC’s will move in direct, lock-step form to Fed rate movements. If the Fed raises .25%, the prime rate will inch up .25% to 3.5%; simply add your margin (ie prime plus/minus prime) to establish your personal rate.
Adjustable Rate Mortgages (ARM’s) – ARM’s are not tied directly to Fed rate movements, but they are greatly influenced by them. In fact ARM’s have already increased about .25% since the Fed began dropping hints of an increase in early November. However, factors such as global economic data, bank fund availability, and alternative investment options can also be significant influences. Murky waters ahead for these right-fit-only products.
Fixed Rate Jumbo Mortgages (>=417k, or >=625,500): Jumbo rates are influenced by Fed rate movements, and have already seen a slight increase since the Fed began jawboning about a move in early November. From here it comes down to how much banks are willing/able to lend from their own funds, and whether they – and global investors – find better returns outside the mortgage arena.
Fixed Rate Conforming First Mortgages (15, 20, 30yr, <=417k): no traditional mortgage products will be completely immune to Fed hikes; however, conforming fixed loans are likely the most insulated. Instead keep watch on global economic performance, inflation expectations, geopolitical events, and stock market fluctuations. The next 6 months will be very interesting for conforming fixed rates…up or down, neither would be a surprise.