Tag Archives: loan

Increasing Interest Rates

Photo Credit: Fed Funds Roller Coaster
Photo Credit: Fed Funds Roller Coaster

On December 16, 2015, the Federal Reserve increased its benchmark interest rate by .25%. This was the first rate increase by the Fed in over nine years!


Generally the Fed makes interest rate moves in cycles. The chart shows the Fed Funds Rate rollercoaster over the past 25 years.

So what does this mean for you and your home loan?


Existing Loans

  • Fixed Rate Mortgages – no affect. Loan terms on existing fixed-rate loans will not change.
  • Adjustable Rate Mortgages (ARMs) – collateral affect. Generally the Fed changes also affects other rate indexes, meaning ARM loans may see increases during their adjustable period.
  • Home Equity Lines of Credit (HELOCs) – direct affect. Most HELOC’s adjust based on the Prime Index, which is directly impacted by the Fed rate change. This means HELOCs may see increases during their adjustable period.


New Loans

Surprisingly, Fed rate increases don’t immediately increase mortgage rates. That’s because the Fed changes affect the Discount Rate and Fed Funds Rate, which is very different from mortgage rates. A mortgage rate can be in effect for 30-years, a rate that is set by the Fed can change day-to-day.


A closer look at historical moves by the Fed shows that its rate cuts often increase mortgage rates in the short term, while its rate hikes often decrease mortgage rates in the short term.


So ultimately, new home loans in the short term will NOT see immediate increases in rates due to the Fed rate hike.


However, the Fed’s move does give a general indication of the overall markets and economy, meaning the trend to come will be elevated interest rate levels.


Feel free to contact us if you have any questions regarding interest rates…we’re here to help!!

Lower Payment vs. Lower Term

Photo Credit: www.PropertyMesh.org
Photo Credit: www.PropertyMesh.org

With interest rates still near all‐time low levels, an argument can certainly be made to consider a shorter mortgage term, such as a 15‐year loan versus a 30-year loan. But there are some important factors to consider.
The greatest benefit of choosing a shorter term is to know that the mortgage will be paid off in less time, saving thousands of dollars in interest payments over the life of the loan. A 15‐year term loan builds discipline, forcing you to make the 15‐year payment.


However, the shorter term comes with a steep monthly payment. A 15‐year loan payment can be several hundred dollars more per month than the 30‐year loan; and in these tough economic times, “cash is king.” That is, cash on hand is king.


Therefore, many people may be better served by having a smaller mortgage payment under a 30‐year fixed rate loan, and then saving or investing the extra money. The key is actually saving and investing the extra money. People who find themselves without a job or who have a pressing financial need would benefit from being able to access these saved funds.
The Tax Consequences

While paying less interest saves you money, it may not save you exactly what you thought since your corresponding tax write‐offs will decrease. Depending on your marginal tax bracket; this could make a substantial dent in the savings you thought were being achieved with the lower interest due. So you must consider income taxes for a relative comparison.


Middle Ground: Flexible Term Loans

You can also choose a point in between the 15-year and 30-year term loan. Refinances are possible to any whole term between 15 and 30 years. That means you can acquire a 17-year term loan or a 23-year term loan, if either of those terms best meet your payment and loan-payback needs.

Best Path for All
Since an individual’s or family’s mortgage payment is often their largest monthly payment, it’s important to get individual advice about your unique situation in order to make the best decision about your home loans. Your short- and long-term financial objectives must be considered.


We’re happy to help you with this decision…don’t take it lightly!

What are your thoughts on acquiring a home loan? Is it best to go with the lowest possible payment, or shortest affordable term? Let us know your thoughts!