Predicting rates on mortgages in 2018
Trying to predict mortgage rates isn’t easy. After all, there are many factors that can impact rates. And they have a tendency to change quickly and often.
The good news is that fixed mortgage rates have remained buyer-friendly and near historic lows throughout 2017. The bad news is that there’s no guarantee they’ll remain in this range for long.
To forecast where rates may be headed in the coming months, we interviewed a panel of experts. All agreed that rates probably won't skyrocket out of reach in 2018. But they’re likely headed up slightly. And that could affect your purchasing power and ability to afford a home.
The year in review
To gauge where rates may be going, it’s helpful to first look back on the past 12 months.
Rates in 2017 began higher, following the national election in November 2016. Scott Browder, owner of the Browder Hurley Group brokerage, explained, “For the first two months of 2017, rates jumped considerably after stocks jumped and bond prices dropped.”
But rates stabilized and fell a bit after that, says Amy Tierce, vice president of sales and marketing for Mortgage Equity Partners.
“Rates have been relatively stable, with slight ups and downs throughout the last several months,” Tierce says. “There have not been any significant events that would cause rates to move in either direction.”
Currently, the average rate for 30-year fixed mortgages is 4.08 percent. That’s well below the highs seen in early 2017.
Best estimates from the experts
Robert Johnson, president/CEO of The American College of Financial Services, says rates should jump up a notch or two over the next year.
“The Federal Reserve is expected to pursue a more restrictive monetary policy,” says Johnson.
“And, according to the CME’s FedWatch Tool, by June 2018 there is a 79 percent probability that the target Fed Funds rate will be at least 50 basis points (0.50 percent) higher than today. By November, there’s an 89 percent chance that rates will be at least 50 basis points higher than now.”
Put another way? “Potential home buyers should expect to encounter a higher interest rate environment as the year progresses,” says Johnson.
Tierce buys into that philosophy.
“Expectations are that rates will be in the high four percent to mid five percent range by the end of 2018,” says Tierce.
Rates may jump; we ask, "How high?
Dr. Clifford Rossi, professor of finance at the University of Maryland, also agrees that rates are headed north, only not quite as high. He believes rates will range between 4 and 4.25 percent in six months and 4.2 and 4.4 percent by this time next year.
“Economic growth is starting to pick up. Meanwhile, unemployment rates remain quite low,” says Rossi. As a result, “I expect mortgage rates to edge up only moderately in the coming year.” Rossi says.
“Rates should stay in the low four percent range in 2018,” says Browder.
Curious what Freddie Mac thinks? It forecasts gradual increases in 30-year fixed rates to 4.6 percent next year.
“That seems reasonable to me,” says Craig Garcia, President of Capital Partners Mortgage.
Ralph DeFranco, global chief economist with Arch Mortgage Group, is also in this camp.
“Mortgage rates will continue to rise next year, perhaps by a half percent,” says DeFranco.
What can affect rates in 2018
Rossi says that three to four Fed rate hikes are on tap next year. These may drive mortgage rates higher. But that’s more likely due to changes in intermediate-term rates. These include five- or seven-year Treasury Note rates. When the Treasury yield curve goes up, mortgage rates tend to follow.
“Fed policy certainly is an important factor. Increases to Fed Funds rates, due to concerns over things like inflation, tend to cause the short-end of the Treasury yield curve to rise,” says Rossi.
But the yield curve has been flattening of late.
“This has been an indicator of economic softening. I expect the yield curve to remain relatively flat over the coming year,” adds Rossi. “As a result, this should translate into a reasonable period of stability for mortgage rates.”
Other things that can cause rates to rise
Other notable factors can drive rates, too. For example, the 2018 midterm election results or unexpected world events like a major terrorist attack could impact mortgage matters.
“The stock market could turn bearish, causing rates to drop some. The economy could go into a recession. Or gross domestic product (GDP) might jump to a consistent four or five percent,” says Browder.
There’s also the impact of tax reform legislation.
“If the tax plan goes through as is, this could stimulate job growth and the economy,” says Garcia.
This can cause home loan rates to rise.
“If tax reform is signed into law, eventually more jobs are created and wages begin trending up due to lower tax rates. With this, GDP rises and folks begin spending more as consumer sentiment rises,” Browder says.
Your next move
The pros agree: rates are likely ticking up in 2018. Many also believe that home prices will continue to rise due to low supply of homes for sale. So what’s a home shopper to do?
Garcia suggests acting soon.
“Buyers would be incentivized to purchase now, rather than wait. The same home may cost them more to buy and pay for on a monthly basis a year from now,” says Garcia.
Others second that advice.
“The sooner you purchase, the more quickly you can enjoy in the wealth creation through real estate,” says Browder.
Assess your options
Rossi, however, cautions against acting too fast and trying to beat a rate hike.
“The borrowing environment will remain favorable to prospective buyers over the next year,” says Rossi. “Take time and investigate loan programs that may be better suited to your needs, like an FHA loan.”
But don’t delay in getting your financial ducks in a row.
“Borrowers in the best position to obtain the best mortgage terms will be those with FICO scores over 660, loan-to-value ratios less than 80 percent, and debt-to-income levels of 43 percent and below,” Rossi adds.
What are today's mortgage rates?
Today's mortgage rates are lower than experts predict they will be next year. But they will probably still be highly-affordable, so don't rush into your next purchase. You have time.
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