Best financial moves to make: Mortgages

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Here’s how the Fed’s latest announcement will affect mortgage rates.

Fixed-rate mortgages:
The economy has changed since the last meeting of the Federal Reserve’s rate-setting committee. In November, the economic recovery had yet to gain traction, with a poor job market and low inflation. But job growth has picked up and inflation might be making a comeback. That’s a recipe for higher interest rates.

Many economists expect the Fed to raise short-term rates when the rate-policy body meets Aug. 10. Don’t expect mortgage rates to wait. Rates on 15- and 30-year fixed-rate mortgages tend to move up and down before the Fed acts. If the Fed raises short-term rates Aug. 10, it will be preceded by months of positive economic news and much speculation. Long-term mortgage rates will rise during that period, anticipating the Fed action.

Don’t panic. Most housing economists expect long-term mortgage rates to rise this year, but slowly; 30-year rates are expected to end the year at well under 7 percent.

In’s weekly index of mortgage rates offered by large lenders, the average 30-year rate on April 28 was 6.07 percent. The average 15-year rate was 5.40 percent.

Best move now:
Long-term rates have risen about six-tenths of a percentage point in the last month, ignited by an employment report that estimated the economy created a net 308,000 jobs in March. Some observers, including the chief economist for the Mortgage Bankers Association, believe that long-term rates rose too far and will fall back a little before resuming an upward path in the summer. Other economists expect rates to continue rising, but gradually.

Faced with more than the usual uncertainty, you might want to decide now how high a rate you’re willing to pay. Then you could float and hope that rates stay the same or drop. But if rates rise, you will have identified the point at which you would lock. You have to have discipline to do this, and the emotional strength to refrain from kicking yourself if rates rise, you lock, and rates fall back.

Adjustable-rate mortgages:
In’s weekly index of mortgage rates offered by large lenders, the average one-year ARM on April 28 was 3.85 percent, almost exactly the rate at the beginning of the year. The average rate on the 1-year ARM started the year at 3.87 percent, dipped almost half a point, and returned.

Best move now:
Because they sport such low rates, ARMs have increased in popularity. You definitely should consider an ARM if you plan to live in the house for five or fewer years. You can get a “hybrid ARM” — one with a lower initial rate that lasts for three, five, seven or 10 years, and then adjusts annually thereafter.

If you plan to live in the house for a long time, you might be better off getting a fixed-rate mortgage, especially if you’re a middle-class person whose earnings come from wages or a salary. People who have a lot of investment income might find ARMs to be appropriate, even if they plan to occupy the house for a long time, because they can better handle the risk of rising rates.

Try the mortgage rate search to locate the best deal.