It could be time to hit pause on plans – or look into alternative options
Last week’s rate hike by the Federal Reserve – the fourth consecutive increase of 75 basis points – demonstrates the continued willingness of the central bank to tame inflation. For would-be homeowners, the latest increase means it could be time to hold onto down payments before making a home purchase, an analyst at the credit agency TransUnion recommend.
As was widely anticipated, the Fed on November 2 raised its short-term borrowing rate by 0.75 percentage point to a target range of 3.75% to 4% -- the highest level since January 2008.
“We still have some ways to go and incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected,” Jerome Powell, chair of the Federal Reserve, said in a subsequent press conference. Powell hinted a time when it might be necessary to slow the pace of rate increases: “So that time is coming, and it may come as soon as the next meeting or the one after that,” he said. “No decision has been made.”
Amid such uncertainty, TransUnion has offered guidance for consumers as the Fed tries to pump the brakes on inflation.
“From a consumer credit perspective, the most significant impact of these rate hikes on borrowers will continue to be in the mortgage market, and increasingly, during the holiday shopping season, in the credit card industry,” Michele Raneri, vice president of US research and consulting at TransUnion, told Mortgage Professional America in a statement.
Read more: Adjustable-rate mortgages – the answer to housing market volatility?
Raneri offered advice to those intent on buying a home – suggesting less traditional financial products until economic uncertainty wanes: “In the mortgage market, consumers who may otherwise be considering buying a home may choose to continue to hold onto their down payments, waiting to see if interest rates and/or home prices decline in the not-too-distant future,” she said. “For those consumers who do purchase a home, adjustable-rate mortgages may continue to be more popular among consumers seeking lower monthly payments in the short term. And consumers looking to tap into available home equity may continue to look towards HELOCs and HELOANs instead of refis. Finally, on the credit card front, this latest interest rate hike will most acutely impact those consumers who do not pay off their credit card balances in full through higher minimum monthly payments.”
In a June interview, Melissa Cohn (pictured below) – regional vice president at William Raveis Mortgage and a 40-year mortgage industry veteran – touted the use of adjustable-rate mortgages at least for the short haul while inflation is being tamed. She noted ARMs are different now then their iteration during the Great Recession of 2008.
“That’s like talking about the Old World,” she told MPA while contrasting ARMs from the past to those offered today. “Adjustable-rates are a very different animal today.
“The adjustable-rate mortgages that gave ARMs a bad name and reputation were loans with which monthly payments were not sufficient even to cover the interest that was due on the mortgage and the loan negatively amortized, meaning that each payment you made was only a partial payment of the interest due. Instead of paying down your mortgage, the principal balance grew each month. Those mortgages don’t exist today, except in very rare exceptions.”
Read next: The rebirth of the adjustable-rate mortgage
Today’s ARMs offer flexibility too, she noted: “You can get an adjustable rate for three years, five years, seven, up to 15 years. Let’s say there’s a seven-year adjustable: During the first seven years, it’s a fixed rate as far as you know. The monthly payment is interest and principal; you’re paying down your loan the same way; you’re amortizing it the same way you would with a 30-year fixed.
“At the end of the initial rate period, there are adjustments. You’re never negatively amortizing the loan. There are caps, formulas that determine what the rate will be using well known, easily found indices such as the 10-year Treasury or the new SOFR Index. They act as a great bridge.”
Raneri also urged consumers to stick to strict budgets during inflation – particularly ahead of the Christmas holidays: “As we enter the holiday shopping season, it’s essential for consumers to set a budget and stick to it, as the price increases for all range of goods over the past year may make it easier for shoppers to overspend,” Raneri said.
“While shopping for gifts, it’s a good idea for consumers to remain diligent when using credit. It’s important to understand that as interest rates rise, so can minimum credit card payments. Therefore, when making purchases using credit this holiday season, consumers should carefully consider what they will confidently be able to afford to pay off and avoid delinquency.”
