What’s Up With Mortgage Rates?
Interest Rate Set by The Fed
On September 17th the Federal Reserve (“The Fed”) cut its benchmark interest rate by 0.25%.
Does that mean mortgage rates will now drop by 0.25%? The short answer is no.
The Fed doesn't directly set mortgage rates but it does influence them. The Fed’s role is to promote maximum employment and stable prices in the economy. It’s a balancing act:
If inflation is high, The Fed tends to increase rates to stabilize prices and slow growth.
If unemployment is high, The Fed tends to cut rates to stimulate job growth.
The interest rates set by The Fed control short-term rates such as HELOCs, credit card and car loan interest rates.
Mortgages rates on the other hand, follow long-term economic metrics, namely the 10-Year Treasury yield, inflation expectations, and mortgage-backed securities.
* Key Point: This means current mortgage rates have already priced in the September 17th rate cut. As of October 3rd, the average 30-year fixed rate hovering around 6.3%.
What Impacts your Mortgage Rate
1. Inflation - Higher inflation typically brings higher interest rates.
2. The Bond Market - Mortgages sold on secondary market.
3. The Economy - Metrics such as unemployment data.
4. Loan Type - Purchases typically have the better rates than refinances. Cash-out refinances typically have the highest rates.
5. Your Financial Profile
Credit Score
Down payment: low down payment means higher risk which means higher rate.
Property Type: Condos for example, have higher rates because of increased risk to lenders.
Debt to Income Ratio: how much money you have leftover after your mortgage payment.
Message me “Rate” to find out your rate.
Mortgage Interest From Tax Perspective
You are allowed to deduct interest on your primary & secondary home on $750,000 of debt (total). Beyond $750,000; your interest deduction is limited and there is no tax deduction on the excess interest.
If your rate is over 7%, action and strategy beats prediction in looking for money saving opportunities.
Landlords know their rental properties don’t have this limitation and you get a deduction for interest against your rental income.
When to Refinance to Lower your Rate?
The Breakeven Analysis
A refinance decision is based on return on investment and lifestyle. Would a lower monthly payment make a difference in your life? Refinancing isn’t free but it could be a good long term investment.
If your monthly savings is enough to recoup the fees in a reasonable amount of time, then it makes sense to refinance to a lower rate. After the breakeven point, the monthly savings can really add up. Especially if you invest those funds!
Want to know your breakeven point? Message me “Breakeven”.
Using Your Home Equity
If you are sitting on equity in your home, you can pull out cash to use tax free! Sounds great however, you need to strategize with your debt and investment portfolio. If you have high interest debt such as credit card debt (with average rates over 20%) then using the equity in your home with to pay off the debt could make sense. Why pay 20% when you can pay 9% with a HELOC?
The tax deduction on the interest you’ll pay is based on how the debt is used.
If debt is used to buy, build, or improve your home, then interest and points are deductible an itemized deduction.
If used for business or rental then interest may be fully deductible.
If the funds are for other personal use, the interest is not deductible.