Borrowing Costs Will Be Higher But Still Coming Off Historic Lows
Interest rates for business loans, at one point last year, dipped below 4%. That didn’t last, and the average small business loan is on its way to as high as 8%, but it is important to remember that borrowing costs remain very low relative to history. Another 75 basis points from the Fed is not insignificant, and it will flow through the bank lending market.
“When the Fed starts hiking it has a ripple effect across all interest rate indices,” said Chris Hurn, the founder and CEO of Fountainhead, which specializes in small business lending.
But Hurn noted that with the historically low rates, the monthly interest payments made by business owners shouldn’t be impacted as much as the headlines might otherwise suggest. A small business owner taking on debt for a $200,000 piece of equipment, for example, will pay a little extra a month more or less depending on the loan amortization period but for most loans the increase in monthly interest should not be a major cash flow issue.
“A few hundred basis points, people can withstand,” Hurn said.
“Most business owners look at that monthly amount and they can support that 75 basis points,” said Rohit Arora, co-founder and CEO of Biz2Credit, which focuses on small business lending. “It’s not that significant on a 10-year loan,” he added.
Mortgage Rate Strategies For September 2022
Mortgage rates grew fast and furiously to open 2022. The pace slowed in the second quarter, then interest rates shot up after the Feds 0.75% federal funds rate hike in mid-June. The central bank said it anticipates multiple similar hikes in 2022. Mortgage rates could climb throughout the rest of the year as a means to offset inflation. However, opportunities to lock in a low interest rate do still exist for home buyers and refinancing homeowners.
Here are just a few strategies to keep in mind if youre mortgage shopping in the coming months.
Todays Mortgage Rates And Your Monthly Payment
The rate on your mortgage can make a big difference in how much home you can afford and the size of your monthly payments.
If you bought a $250,000 home and made a 20% down payment $50,000 you would end up with a starting loan balance of $200,000. On a $200,000 home loan with a fixed rate for 30 years:
- At 3% interest rate = $843 in monthly payments
- At 4% interest rate = $955 in monthly payments
- At 6% interest rate = $1,199 in monthly payments
- At 8% interest rate = $1,468 in monthly payments
You can experiment with a mortgage calculator to find out how much a lower rate or other changes could impact what you pay. A home affordability calculator can also give you an estimate of the maximum loan amount you may qualify for based on your income, debt-to-income ratio, mortgage interest rate and other variables.
Other factors that determine how much you’ll pay each month include:
Loan Term:
Choosing a 15-year mortgage instead of a 30-year mortgage will increase monthly mortgage payments but reduce the amount of interest paid throughout the life of the loan.
Fixed vs. ARM:
The mortgage rates on adjustable-rate mortgages reset regularly and monthly payments change with it. With a fixed-rate loan payments remain the same throughout the life of the loan.
Taxes, HOA Fees, Insurance:
Homeowners’ insurance premiums, property taxes and homeowners association fees are often bundled into your monthly mortgage payment. Check with your real estate agent to get an estimate of these costs.
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Savings Accounts And Cds
Interest rates for savings accounts and certificates of deposit track the London Interbank Offered Rate . That’s the interest rate at which major international banks are willing to offer eurodollar deposits to one another.
The LIBOR rate rarely diverges from the fed funds rate. Banks may pay you a little less than LIBOR so they can make a profit. Savings accounts may follow the one-month LIBOR rate, while CDs may follow longer-term rates.
LIBOR’s status as the relevant price index for consumer products is due to be phased out in stages beginning in 2022, with a full phaseout by June 2023.
Why Are Interest Rates Going Up
Interest rates are going up because the economy is starting to have a more positive outlook on post-COVID recovery.
Coronavirus has been the major force keeping mortgage rates low over the past year. The closer we get to widespread vaccination and the better our economic outlook as a result the higher rates will go.
Although the U.S. is still at a critical stage with the virus, were finally starting to see a path forward with the widespread rollout of vaccines and the passage of a $1.9 trillion relief bill championed by the Biden Administration.
The coronavirus relief bill and interest rates
The aim of the new coronavirus relief bill dubbed the American Rescue Plan is to ease the countrys economic burden and spur spending and growth.
Economic growth would likely raise mortgage rates as different sectors rebound.
A stronger economy means investors are willing to take bigger risks with their investments. This moves money out of safe mortgage-backed securities and into different financial vehicles thus pushing mortgage rates up.
Mortgage Professional America Magazine also reported that stimulus spending could increase inflation, which would drive up mortgage rates as well.
Keeping an eye on the 10-Year Treasury bond yields
Eli Sklar, senior loan consultant with loanDepot, pointed to the 10-Year Treasury yield as an indicator of an improving economy and a signal that rates will rise in the coming year.
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Money’s Average Mortgage Rates For September 9 2022
Mortgage rate moved lower across all loan categories today. The average rate for a 30-year fixed-rate loan was down for the second day in a row, decreasing by 0.136 percentage points to 6.731%.
- The latest rate on a 30-year fixed-rate mortgage is 6.731%.
- The latest rate on a 15-year fixed-rate mortgage is 5.601%.
- The latest rate on a 5/6 ARM is 6.395%.
- The latest rate on a 7/6 ARM is 6.422%.
- The latest rate on a 10/6 ARM is 6.393%.
Money’s daily mortgage rates are a national average and reflect what a borrower with a 20% down payment, no points paid and a 700 credit score roughly the national average score might pay if he or she applied for a home loan right now. Each day’s rates are based on the average rate 8,000 lenders offered to applicants the previous business day. Your individual rate will vary depending on your location, lender and financial details.
These rates are different from Freddie Macs rates, which represent a weekly average based on a survey of quoted rates offered to borrowers with strong credit, a 20% down payment and discounts for points paid.
Current Mortgage Rates: Is It A Good Time To Buy A House Right Now
2022 started off with dramatic rate increases. But from a historical perspective, mortgage rates remain at comparatively normal levels.
With a combination of limited supply of homes and strong demand, home prices are up significantly from before the pandemic. The higher costs to build homes and the massive demand from buyers is also contributing to the surge. This, plus higher mortgage rates, makes the overall cost of homeownership more expensive for the borrower.
The difference of a half a point or so can equal a lot of money over a 30-year mortgage. But its best not to try to time the market to get the best mortgage rate. Experts say, instead, to focus on finding the right house, and make moves when your personal lifestyle and financial situation indicate its the right time.
Rates between mortgage lenders can vary significantly. Make sure to shop around between a few different mortgage lenders to ensure youre getting the best current deal. The rate highly impacts your monthly affordability for as long as you will hold this home, Skylar Olsen, principal economist at Tomo, a digital real estate and mortgage company, told us. It is actually a critical piece of this decision, and that takes shopping around.
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Covid Vaccines Will Set The Tone For Mortgage Interest Rates
Although the two might seem unrelated, the progress of COVID vaccinations is one of the biggest drivers behind mortgage rates right now.
In theory, as more people get the vaccine and are able to safely eat at restaurants, travel, and attend large events, the economy will regain some of the momentum lost during the pandemic.
However, a full recovery will take time, particularly if many opt not to get the vaccine due to fear of side effects.
The Pew Research Center found that as of December, 60% of Americans surveyed said they would likely take the vaccine once it became available to them. But 21% expressed misgivings about the vaccine and said they would probably not get it, even once more information became available about it.
Although the percentage of people who need to be vaccinated in order to achieve herd immunity to COVID-19 is not yet known, according to the World Health Organization, it typically must be significantly higher than 60%. So it will take a lot of doses and willing participants to get the economy back on track.
Remember that a weak economy means low mortgage rates, because investors pour money into the safe haven of mortgage-backed securities . This pushes rates down.
As the economy improves, which will gradually happen with widespread vaccination, investors will turn elsewhere and mortgage rates will once again increase.
What Credit Score Do Mortgage Lenders Use
Most mortgage lenders use your FICO score a credit score created by the Fair Isaac Corporation to determine your loan eligibility.
Lenders will request a merged credit report that combines information from all three of the major credit reporting bureaus Experian, Transunion and Equifax. This report will also contain your FICO score as reported by each credit agency.
Each credit bureau will have a different FICO score and your lender will typically use the middle score when evaluating your creditworthiness. If you are applying for a mortgage with a partner, the lender can base their decision on the average credit score of both borrowers.
Lenders may also use a more thorough residential mortgage credit report that includes more detailed information that wont appear in your standard reports, such as employment history and current salary.
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Mortgage Rates Will Climb Modestly But Expect A Rate Roller Coaster
30-year fixed rate mortgage: 3.5 percent
When the novel virus first swept the nation, experts foresaw the pandemic wreaking havoc on the housing market. The exact opposite happened. An aggressive Fed, all-time low mortgage rates and city-fleeing Americans helped send the sector booming.
Though the cost of borrowing for a home will still be historically cheap in 2022, would-be homebuyers might miss out on the chance to score a mortgage below 3 percent. McBride sees the 30-year fixed-rate mortgage peaking in 2022 at 3.75 percent and finishing the year at 3.5 percent, which would be the highest since May 2020.
How mortgage rates play out depends primarily on two factors: inflation and the 10-year Treasury yield, which lenders use as the benchmark for mortgage rates. Both also tend to influence each other, with the key 10-year rate partially reflecting investors inflation expectations.
McBride sees inflation in 2022 moderating notably from its 2022 highs to an annual rate of around 3 percent, while he expects the key bond rate to hit a high of 2 percent and then drift down to 1.7 percent. The key rate hasnt eclipsed 2 percent since the middle of 2019.
Long-term rates will move higher in the first half of the year, but by the close of 2022, concerns about slowing economic growth will be unwinding that and bringing them back down, McBride says. This means a roller coaster ride for mortgage rates.
For more details, read Bankrates mortgage rate forecast.
Rates Should Not Be The No 1 Determinant Of Business Debt Decisions
The mortgage market has been the primary example of how quickly sentiment can shift, even when rates remain low relative to history, with homebuyer demand declining rapidly as mortgage rates have gone up. For business owners, the decision should be different and not based solely on the interest rate.
Business owners need to make a calculated decision on whether to take on debt, and that should be based on analysis of the opportunity to grow. Higher cost debt, and a slight drag on margins, is a price that a business should be willing to pay if top line growth is there for the long-term.
Arora says the most likely determinant right now is what happens with consumer demand and the macroeconomy. The lack of visibility in 2008 led many business owners to pull back on debt. Now, an 8% to 9% interest rate on a loan isn’t as big a factor as whether their sales outlook is improving, their average bill going up or down, and their ability to find workers improving or worsening.
“They shouldn’t mind taking the hit on the bottom line if they can see where it’s going, helping to gain more new clients and pay bills, and stock up on inventory ahead of the holidays,” Arora said.
“Big demand destruction into the holiday season and then they won’t be borrowing,” Arora said. “What they cannot live with is very steep demand destruction.”
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Mortgage Rate Forecast: What Is Driving Mortgage Rate Change
Mortgage rates have increased because of a variety of economic factors so far this year. Persistently high inflation is a big one, Jacob Channel, senior economic analyst at LendingTree told us. Junes inflation report showed 9.1% inflation, the highest level in 40 years. But Julys most recent CPI report has year-over-year inflation at 8.5% a sign that inflation is starting to cool.
To combat this inflation, the Federal Reserve increased its benchmark short-term interest rate. Since inflation remained higher than expected, the Fed raised rates by 50 basis points in May, by 75 basis points in June, and by 75 basis point in July.
Following the inflation report, mortgage rates spiked ahead of the Feds announcement. I think what were seeing is that lenders had already anticipated that the Fed was going to raise the Fed funds rate by 75 basis points and they began to preemptively push mortgage rates up, Jacob Channel, senior economist at LendingTree, told us.
There are signs that some of the main drivers of inflation are easing, such as lower oil and other commodity prices in July, slower wage growth, and declining supply chain pressures. However, service price increases led by housing and pent-up demand for vehicles will keep inflation elevated in the coming months, Dawit Kebede, senior economist for the Credit Union National Association, said in a statement.
Will My Mortgage Go Up
Only if you have a variable rate mortgage typically a tracker that follows the base rate, or a loan on a lenders standard variable rate.
A tracker mortgage will directly follow the base rate the small print of your mortgage will tell you how quickly the rise will be passed on, but next month your payments are likely to go up and the extra cost will fully reflect the base rate rise. On a tracker currently costing 2.25%, the interest rate would rise to 2.5%, adding £18 a month to a £150,000 mortgage arranged over 20 years.
Some lenders move borrowers on to rates explicitly linked to the base rate when their fixed-rates come to an end. Santander, for example, has what it calls a follow-on-rate that borrowers who took out deals since 23 January 2018 move to at the end of their special offer. At the start of this month it went from 3.50% to 3.75% following , and it is now set to hit 4%. This means since the start of December the monthly repayments on a £150,000 mortgage over 20 years have gone up from £858 to £909.
On a standard variable rate things are less straightforward these can change at the lenders discretion. Not all lenders passed on , although they did move with Februarys rise. Some, such as Nationwide and Halifax, have passed on both previous increases in full.
Several million homeowners are now unmortgaged, thanks to years of low rates and enforced saving during lockdowns.
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Sba 7 Loans Will Get More Attention Variable Rates Are A Factor
The fact that banks will be stricter on loans doesn’t mean the need for growth capital is declining.
Small business lending demand has been down for a good reason, with many business owners already helped by the Paycheck Protection Program and SBA Economic Injury Disaster Loan program. But demand has been increasing just as rates started going up, in a similar fashion to consumers running through their pandemic stimulus savings yet also running into tighter lending conditions.
Loans made through the SBA 7 loan program tend to be slightly more expensive than average bank loans, but that difference will be outweighed by the availability of debt as banks slow their lending. Currently, bank loans are in the range of 6% to 8% while the SBA loans run a little higher, in the range of 7% to 9%.
When the banks aren’t lending, the SBA loan program will see more activity, which SBA lenders Fountainhead and Biz2Credit say is already happening.
“We’re already seeing the shift in volume,” Arora said. “Our volume has been going up over the past three to four weeks,” he added.
Approximately 90% of SBA 7 loans are variable, prime rate plus the SBA spread, and of those loan types, 90% or more adjust on a quarterly basis as the prime rate adjusts.
If SBA loans were in the range of 5% to 6% last fall, now business owners are looking at 7.5% to low 8%, and that is for loans that are typically 50 basis points to 75 basis points higher than bank loans.
