EZ Mortgage Monitor - December 19, 2015 -

EZ Mortgage Monitor – December 19, 2015

We have liftoff!

The Federal Open Market Committee finally took their first steps towards normalizing monetary policy. There’s still a looooong way to go but, the first steps were taken last week.

We haven’t seen an increase in the Federal Funds rate since 2006, and there hasn’t been any shift at all, since the Fed moved their target rate between zero and .25% back in December of 2008, at the height of the market meltdown.

Additionally, they plan to continue reinvesting proceeds from their treasury and mortgage backed securities portfolios, meaning they’re still helping support those markets, and according to their policy statement “anticipate doing so until normalization of the federal funds rate is well under way.”

So, what does this mean to you?

In the near term, mortgage rates aren’t likely to shift much. They’re slightly higher now than they were a week ago, but most of that actually occurred prior to the FOMC policy statement, possibly as an anticipatory move, or possibly for other reasons. Either way, they’re still very much within the same range we’ve seen all year.

Mortgage rates are on the long end of the yield curve, and are more subject to supply and demand pressures than the short end of the curve, driven by the federal funds rate, where credit cards, car loans and student loans live.

It’s even possible that mortgage rates could actually dip.

If people believe that equities markets have done so well over the last few years, more from monetary policy, than a strengthening economy, and they feel companies’ stocks will underperform as the “punch bowl” of easy monetary policy is taken away, they may move funds into treasuries and mortgage backed securities, driving prices up, and yields (interest rates) down.

Certainly, over time, nothing will change from what we know. Rates cannot, and will not, stay as low as they’ve been forever. They will rise. But, just like the thirty-plus years that saw mortgage rates drop from double digits to low single digits, with various spikes and plateaus along the way, they’re probably going to move incrementally higher, in fits and starts, too.

We’re probably looking at a very slow trajectory of increases both with the federal funds rate and mortgage rates. And, as Federal Reserve Chair Janet Yellen said, by beginning to remove some of their extraordinary measures, they’re creating a little cushion, in case their projects are wrong, and they need to ease monetary policy again.

There are still, after all, potential headwinds that could slow or derail the progress the US economy is making.

In the meantime, if they’re able to stay on course with incremental increases in the federal funds rate next year, where you will see more of an impact will be on credit card, student loan, car loan, home equity lines of credit, and adjustable rate mortgages, too.

Each of those are typically benchmarked by a specific short-term interest rate. Credit cards, for example, are tied to the Prime rate. The Prime rate generally mirrors the federal funds rate, but about 3% higher, so as of last week, Prime will shift to roughly 3.25% to 3.5%. Most credit cards will have a margin over prime of somewhere between 6% and 12%, depending on your credit profile and the credit card you use.

Similarly, home equity lines of credit are tied to the Prime rate, with a margin that may be from -.5% to +4% or so. Those too will see an increase with each upward move of the federal funds rate.

Adjustable rate mortgages are typically indexed to the 12-month LIBOR (London Interbank Offer Rate) or sometimes the US Treasury yield. Although the prime rate and LIBOR are not directly linked, they’re both short term rates, so as one rises, typically so will the other. In general, adjustable rate mortgages have a 2.25% or so margin over prime. So, if you’ve got an ARM that is in its adjustment period, or approaching that point, you’re going to see incremental increases in your payments.

One advantage of an Adjustable Rate Mortgage, however, is that they come with adjustment caps. So, even if rates increase, you may be protected in the near-term from feeling the brunt of that. Or, if you can afford to pay down the principal aggressively, you may be able to stay ahead of the rising yield curve. Feel free to give me a call if you’re curious about your exposure to your adjustable rate mortgage increasing.

All that said, we’re still within about .5% of the lowest mortgage rates we’ve seen, ever. But, we know it cannot, and will not last. And, I think, for the first time, in a long time, we can officially say we’re accelerating the engines to lift off this historic floor (I know. I said that in May/June 2013, but this time, I think I mean it).

Could there be events to derail that progress, and see rates dip again? Sure. Would I bet on that happening? No.

So, as I like to say, better get ‘em while the gettin’s good. Even if that “gettin’” could last for another several years, in relative terms. After all, it wasn’t that long ago – heck, about ten years – that rates lower than 6% were seen as ridiculously low. Now, anyone looking at the high 4%s is feeling put out. It’s funny how things change. I guess they’ll just keep changing, too.

As they do so, I’ll do my best to keep you posted on what rates are doing, and my take on why. Here’s how our rates ended this week.

Please don’t hesitate to call or email if you, your friends, clients, or family have questions about buying or refinancing residential or commercial real estate.



Conforming Rates Points APR Loan Amt Payment
30 yr fixed mortgage 3.875% 0 3.925% $     300,000.00 $         1,411
15 yr fixed mortgage 3.125% 0 3.175% $     300,000.00 $         2,090
3/1 ARM 3.625% 0 3.675% $     300,000.00 $         1,368
5/1 ARM 3.625% 0 3.675% $     300,000.00 $         1,368
Jumbo (ask me about Super Conforming limit, per your zip code)
30 yr fixed mortgage 4.250% 0 4.280% $     550,000.00 $         2,706
15 yr fixed mortgage 4.125% 0 4.155% $     550,000.00 $         4,103
3/1 ARM 3.875% 0 3.905% $     550,000.00 $         2,586
5/1 ARM 3.250% 0 3.280% $   550,000.00 $         2,394
Rates subject to change without notice.
Please keep in mind, these rates and statistics are for informational purposes only to give you a sense of market movement and my opinion as to why. Although these rates exist today, based on certain qualifying characteristics (740+ fico, owner occupied SFR with 75% loan to value ratio or less), your scenario may allow for lower or higher interest rates. Licensed by the CA Dept of Real Estate, #01760965. NMLS: 239756. Equal Opportunity Housing Lender. If you’d like to be removed from this list, please reply with REMOVE in the subject line. You can also use this link, mailto:eric@ezmortgages.us and add REMOVE to the subject line. To add someone who would appreciate this information, send me their email with SUBSCRIBE as subject.
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