Are Mortgage Rates Set to Blast Off?


Are Mortgage Rates Set to Blast Off

The Fed is expected to raise interest rates for the first time in 10 years and uncertainty hangs over the financial markets and the direction of interest rates. Will this be the first of many rate hikes? Will it have a huge impact on mortgage rates going forward?

Home buyers don’t need to panic, but they should have a sense of urgency if they plan to buy in the next year or so and want to get the most house for their money.

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The Past

In early 2000s, following the dotcom bubble, the Fed decreased its benchmark rate to 1 percent. In the summer of 2004, the Fed started hiking the rate by a quarter percent. When the increases started, a 30-year fixed-rate mortgage had an interest rate of 6.3 percent, but instead of going up it went down to 5.7 percent during the next 4 months.

The Fed kept raising the benchmark rate (the Fed funds rate) and the rate on a 30-year fixed-rate mortgage continued to descend, hitting 5.58 percent by June 2005. The Fed  increased the rate in the for the final time in the summer 2006. At that time, the rate on a 30-year fixed-rate mortgage stood at 6.68 percent. So during the period when the Fed was raising rates, mortgage rates rose less than half a percentage point. On the other hand, the Fed’s benchmark rate jumped 4 percent, from 1.25 percent to 5.25 percent.

The Present

Here’s what’s different this time around. The Fed hasn’t lifted its benchmark rate in almost a decade, so it’s difficult to forecast how the market will respond to such a huge change. But, odds are there will be some volatility.

The real estate market is extra-sensitive to interest rates because a raise in the mortgage rates directly impacts a buyers buying power. The expectation that the Fed would raise rates sooner, rather than later has been a big driver in rises in home sales and home prices in 2015. This is likely to continue throughout 2016 if the Fed indicates more interest rate increases are on the horizon.

Fed Fund Rates and Mortgage rates

As you can see from the chart above, there is some connection between the Fed funds rate and mortgage rates, but it is not exact. Mortgage rates usually have a better connection to 10-year U.S. Treasury yields. Bonds usually go up or down before the Fed officially announces its intentions. If 10-year Treasury yields increase, mortgage rates typically go up. Last week the 30-year fixed-rate average stood at 3.95 percent according to Freddie Mac’s national survey of lenders. It has stayed under 4 percent since late July.

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The Future

The Mortgage Bankers Association predicts that the 30-year fixed-rate mortgage will climb about 1 percent, topping around 4.8 percent by the end of 2016.

But forecasting the future of mortgage rates is tricky business. As it’s not just about one rate hike, but what they do over the course of the year and how the market expects rates to progress moving forward.

Here’s a breakdown of how an increase in interest rates could impact your buying power over the next year.

How Increase Mortgage Rates Affect Buying Power

Summing It Up

So here’s the bottom line if you plan to buy a house in the near future, act sooner, rather than later. Sure rates could go down, but it is unlikely based on the how low they currently stand. Even if mortgage rates don’t blast off right away, they should start moving upward in to 2016 and beyond. This gradual increase will continue to erode your buying power and you’ll get less house for your money the longer you wait.

Ready to Buy?

Search all Savannah area homes for sale @

Ready to Sell?

Go here to discover how much your home is worth. 



December 16th, 2015 by