Your home is arguably one of your most valuable assets. When looking to purchase your home, you should around for a mortgage to find the lowest interest rate.
The Feds recently announced a 0.25% interest rate reduction on July 31st, 2019. It’s the first time the Feds have cut interest rates in over a decade. Now, you may be wondering what this means for you. Borrowing will be less expensive, but your deposit products will yield lesser amounts. In respect to mortgages, we’ll divide it up into the two categories of variable and fixed mortgages. Update: The Feds interest rate cut is more beneficial for homeowners looking for a HELOC.
Fixed Mortgage Rates
The current environment will have little affect if you have a fixed interest rate mortgage. Fixed rate mortgages are typically pegged to the Treasury yields and those are determined through natural market movements.
Currently, you may have noticed that the yield curve is inverted, which historically has been an event worth noting. What this means is the market wants to stay in short-term monies. Also, while there is no concrete proof, an inverted yield curve has been a signal many look at for a potential recession. While market speculation is something you should limit, it is worth keeping that in the back of your mind while you research the current market environment.
If you are looking to shop for a new home, then you will have the benefit of lower interest rates. Given the current market expectations rates may continue lower, thus driving down the price of a fixed mortgage rate. Now, if you currently have a fixed rate mortgage and believe you’re paying too much, this can be a great time to refinance to a lower rate and take advantage of the low rate environment. Make sure you run the numbers because the last thing you want is to refinance and it doesn’t financially benefit you over the life of the loan.
Variable Mortgage Interest Rates
Moving to a variable interest note, this product is the one that will show immediate change from the updates interest rate. As the name suggests, a variable interest rate loan changes as the underlying pricing product changes. If you currently have a variable rate mortgage, then you are happy that rates are being cut because you’ll begin saving money on your interest expense.
As the rates continue to fall your payment will lessen, which gives you the ability to apply more towards principal. However, the difficult decision is if you’re a first-time home buyer looking for a mortgage because you have to make a decision. If you believe interest rates are going to remain the same or increase, you’ll likely want the fixed rate mortgage. On the flip side, if you think rates may fall a little more, than a variable rate may be in your best interest.
Keep in mind though with the variable rate note, if you’re wanting the lowered rate make sure you can refinance into a fix to lock your lower rate. When comparing the two products in comparison to interest rate cuts you must remember that small rate cuts will have little impact on the overall cost of your note, especially if you plan to pay your note down early.
Some things to keep in mind are: “how long does the Fed plan to lower interest rates?“
If the Fed has an agenda to lower rates consistently over a period of time, look at what your mortgage rate is currently and plan to refinance if it seems beneficial. If you are currently using a variable rate mortgage, you may want to shop around and try to lock in that rate as rates historically have not been this low. Other variables that may impact the Fed’s decision to adjust rates include corporate earnings, employment data and consumer confidence. Keeping an eye on these data points, along with the current political climate can help you stay in tune with the interest rate environment.