ARM borrowers should consider refinance ahead of Dec. 19 Fed announcement


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On the heels of strong, albeit slightly cooling, labor market numbers, signs point to the Federal Reserve raising rates for a fourth time this year at the next Fed meeting Dec. 18-19.

Fixed mortgage rates are largely unaffected by the Fed’s hikes, which is more influenced by the economy and inflation than short-term interest rates, says Greg McBride, CFA, Bankrate’s chief financial analyst.

“This explains the recent pullback in mortgage rates as concerns about slower economic growth have grown,” McBride points out.

The borrowers who will feel the impact are those with adjustable rate loans.

ARM borrowers should consider refinance

The likely rate hike will have a direct impact on loans with variable rates, this includes adjustable rate mortgages and home equity lines of credit, or HELOCs.

“Variable rate debt will cost more as the Federal Reserve raises benchmark interest rates, so borrowers with home equity lines of credit and adjustable rate mortgages are particularly susceptible. Look into fixed rate options to insulate from any further rate hikes in 2019,” McBride says.

Credit card borrowers will feel the sting of rate hikes, so consolidating that debt into a loan that has a lower interest rate might be a smoother path for some. In  today’s equity-rich environment, homeowners might consider using a HELOC to pay off debt and shaving off the cost of higher rates.

However, it’s important to have a plan in place before borrowing from your home’s equity, warns Mark Hamrick, senior economic analyst at Bankrate.

“Consolidating credit card debt into a HELOC is always an option. But it is absolutely essential that the borrower avoid allowing a negative cycle develop where they’re constantly borrowing from Peter to pay Paul, so to speak,” Hamrick says. “That means avoiding credit card use that can’t be paid off on a monthly basis. For others, taking advantage of zero interest rate transfer offers will be the better way to go. But they’ll still need to pay down, or pay off, the balance as soon as possible.”

Future of housing market

The housing market is cooling, which might be good for homebuyers who have been locked out, due to high prices and rising rates, for the past couple of years. The recent slight drop in rates coupled with some home price slowing in certain markets, might provide a window for buyers who want to get in before rates or home prices rise again.

Although the slight drop in fixed mortgage rates and some price drops in certain markets might seem encouraging, there’s no guarantee that we’ll see enough affordable inventory to meet the demands of homebuyers, especially those who are in the entry-level market.

“The housing market is slowing, but that doesn’t draw a straight line to lower prices. The limited inventory of homes available for sale in certain price ranges will keep prices elevated even if the higher end of the market is slumping,” McBride says.

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