Interest rates can have a profound impact on the overall affordability of your loan. Whether you are actively shopping for a new property, are considering a move, or want to use a mortgage loan for an investment property, you need to understand interest rates, including current rates and forecasts for the future.
Interest Rates and Your Mortgage: A Briefing
We won’t dive too deeply into the detail of interest rates, but you should have a basic understanding of the issue. The interest rate on your mortgage takes into account many different factors, most of which are dependent on you and the lender. However, one factor that remains consistent is the rate set by the Federal Reserve. Essentially, this is the rate at which banks can lend money to each other (it’s more complicated than this, but we’re trying to keep it simple), and this will impact the rate at which banks loan money to consumers of all sizes and budgets. Basically, if the Federal Reserve has low interest rates, banks can charge a lower interest on car loans, business loans, and (of course) mortgages.
Generally speaking, when economic activity is low, the Federal Reserve will lower interest rates. The theory is that by lowering rates, economic activity will is encouraged. So why not keep rates low all the time? Because (so goes the theory again), higher interest rates can create steady, strong growth, as opposed to runaway growth that could (again, in theory!) cause an economic bubble and the virtually inevitable burst.
Interest Rate Forecasts in 2020 and Beyond
Federal Reserve Appears to Be Holding Steady on Interest Rates
At this time, it appears the Federal Reserve is keeping interest rates at a relatively low rate. According to a Wall Street Journal article from mid-December 2019, officials have “signaled no appetite to raise” interest rates in the near future.
In fact, interest rates from the Federal Reserve have actually been lowered at three previous meetings. The reason for lowering the rates is complex. Conventional wisdom would say that because the economy is rolling strong, the Federal Reserve should increase rates, but with trade tensions between the U.S. and other nations, especially China, as well as a global slowdown that could seep into the U.S. economy, the board has decided to lower interest rates or keep them at a steady level.
Back in 2018, interest rates were steadily raised, and most thought that continued growth in interest rates would continue. This was due to an economy that showed tremendous momentum with all the major economic indicators showing positive signs. Unemployment, for example, remains historically low, so it was rightfully assumed that all interest rates would be raised to temper runaway economic growth and shield against a potential bubble.
But those plans were disregarded for numerous reasons. Among them was investor concerns that higher interest rates would slow the economy into a recession.
The Federal Reserve has also faced pressure from the Oval Office to maintain low interest rates. President Trump is emphatic that he wants the Fed to maintain low rates, which he believes will help stimulate an already active economy.
Not only have officials at the Federal Reserve chosen to maintain current interest rates, they have indicated that throughout 2020 they will do the same. Things could change; after all, rates were expected to rise through 2019, but it appears rates are and will remain low for the foreseeable future.
Many Agree: Now is a Great Time to Buy or Refinance
With interest rates low and steady, it appears to be a great time to purchase a home or refinance. In fact, many Americans are seeing this reality.
A December 2019 report from USA Today, which cites various economists and mortgage leaders, says that many experts agree this is a good time to purchase a home. With low interest rates combined with high employment numbers, as many as 9.2 million first-time buyers could enter the market from 2020 to 2022. For comparison, there were 7.6 million first-time buyers between 2016 and 2018.
This increase in buyers will mean greater competition for homes, so it stands to reason that buyers should do their best to find a house before competition drives home prices even higher. Of course, personal factors still matter (you should be ready for homeownership, regardless of market conditions) but if the timing is right, potential homeowners should act quickly.
Refinancing is also on the rise. In fact, it’s rising so fast that some news outlets have called it a “refinancing boom.” A December 2019 article from CNBC states that refinancing applications were up 314% compared to the same week the year before, a rise they also credit to more employment coupled with low interest rates.
Remember, Personal Factors Matter
No matter what happens with interest rates, it’s important to remember that personal factors still matter. Your credit score, for example, is an important indicator of your reliability as a borrower, so if your score is low, you may be stuck with a high interest rate. Debt load is another fact that lenders consider; if you have a high amount of debt, you could be given a high interest rate.
So even if general rates are low, you could be left with a high rate because of personal factors. Therefore, it’s wise to make smart changes that help reduce your rate. Namely, make responsible choices with debt and pay your bills in a timely fashion; over an extended period, this will result in a better score and potentially a lower interest rate, which in the end means a more affordable loan.
Steady Guidance for Mortgage Loans of All Varieties
If you need help finding the right loan for your needs, contact the staff at San Diego Purchase Loans today. We will help you make the perfect choice for your financial future, so whether you are a first-time homebuyer or looking for an investment loan to purchase commercial real estate, we are here to help!