Unless you’re a real data geek, you probably ignore the snooze-fest that is today’s economic reporting. GDP, LIBOR, QE3, CPI and all the other head-spinning acronyms can’t be approached before your second cup of coffee, and maybe not even then. However, if you can suck it up and make a point of understanding these two basic-yet-important concepts, you’ll make smarter decisions about your home, your debt and your career. It’s not that hard.
Four percent is still a good mortgage interest rate. In fact, it’s really, really good.
If you listen to the folks who make their living sensationalizing every routine bulletin (you’ll know them by the number of exclamation points they put in their “news” reports), you might think that mortgage rates are spiking uncontrollably, that housing affordability is plummeting, and that you’d better buy your home NOW!!!!!!! AS SOON AS POSSIBLE!!!
Cooler heads consider the context of today’s mortgage rates, and where they fit in long-term. Mortgage finance company Freddie Mac has been tracking mortgage rates for over 41 years. Freddie’s records show that for 40 of those 41 years, mortgage rates were higher than they are now. Today’s “spiking” mortgage rates are lower than rates in almost any other time in recent history.
Job creation is up, and that’s a very big deal.
The economic recovery has been frustratingly slow for job seekers, and sticky unemployment has been a big factor in keeping interest rates and inflation down. However, the jobs situation has improved steadily, and that does put upward pressure on mortgage rates. The Bureau of Labor Statistics reported that 195,000 new jobs were created in June, 13,000 more than the monthly average of 182,000 during the prior year. In addition, according to the most recent available report, April’s new jobs figure was revised upward by 50,000 to a total of 199,000, and May’s was revised upward by 20,000 to a new tally of 195,000.
These figures indicate that job creation has been better than previously thought and has been reliable and steadily improving in recent months.
Avoid expensive mistakes by understanding the economy.
A look at historical mortgage interest rates and recent employment data can help you answer these and other questions:
1. Should you buy a home now or wait for mortgage rates to drop?
Most people only care about mortgage rates when they’re actively looking for a home. If you started paying attention in the last six months or so, you might have become really alarmed that 30-year fixed mortgage rates rose from their low of 3.35 percent to 4.29 percent (says Freddie Mac). You might have decided to wait until mortgage rates and home prices drop. Now, though, you know that even at 4.29 percent or slightly higher, mortgages have almost never been more affordable. Furthermore, the improving employment situation is likely to push rates and home prices higher. While home prices and mortgage rates aren’t as low as they were last quarter, they’re much more likely to continue rising than they are to fall back. From a historical context, the opportunities are still excellent, and unlikely to get better any time soon.
2. Should you refinance or has that ship sailed?
If you didn’t already take advantage of the lowest mortgage rates in history, get over it. Yesterday’s rate is no longer relevant to you. What IS relevant is a comparison between your current mortgage rate and today’s refinance rates. If you can save money by refinancing (try a mortgage calculator and see), go for it. It probably doesn’t make sense to hold out for a better rate (see above) – rates are likely to continue increasing, and your refinancing window could close before you can lock your mortgage.
3. Fixed or adjustable?
We’re probably looking at a rising interest rate environment. Unless you plan to “fix and flip” or sell your home in just a few years, a fixed-rate mortgage is much safer than an ARM. That said, the average home buyer keeps the property only about seven years, according to the National Association of Realtors, and the average first-time home buyer for only three-to-five years. If that’s likely to be the case with you, consider a hybrid ARM with a rate that’s fixed for 3, 5, 7 or 10 years. Rates can be .5% to 1.5% lower than they are for the 30-year fixed loan.
4. Does home equity financing make sense right now?
Home values are up, so you might have more equity to play with than you did in the past. And home equity rates are also higher. As with first mortgages, though, home equity loans are still very cheap, historically speaking. Today might be en excellent time to secure a fixed-rate home equity loan, or, if you have a convertible variable-rate home equity mortgage, to switch it to a fixed loan.
5. Is it a good time to relocate?
If your career is dead-ending, should you move to another area with better prospects? The Bureau of Labor Statistics reports that state-wide unemployment rates range from 3.2 percent to 9.5 percent. Poorer job markets have three times the joblessness of better ones, so consider that when evaluating a move. Even if you have a job offer already, unemployment matters — your job might not be as secure as you’d like (last in, first out, remember?). You don’t want to find yourself making a spectacular leap from frying pan to fire.
Economics has often been referred to as more art than science, and economists don’t agree on much when getting really technical. However, some principles are widely accepted — that increasing employment means rising prices and interest rates, and that the financial health of a location is highly dependent on its job situation. Understanding these two relationships can keep you from making costly mistakes and help you make decisions that serve you well for years.
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