Your Mortgage: Why you shouldn’t panic about rising interest rates

What a difference a year makes. One year ago this week, the 30-year fixed mortgage rate sank to its lowest level in history. This week, fixed mortgage rates followed long-term bond yields and rose to their highest levels in 20 months.

It’s true. The record-low run of interest rates appears to be winding down. It was fun while it lasted, but the party is coming to an end. What will happen next will be devastating to everyone affected by interest rates.

Wait, what? That’s not true at all. Things will be slightly different, but still totally fine. The hardest part is that all of us have become spoiled. It’s understandable due to rates being so low for so long.

Some home shoppers are fretting that their mortgage rates will now have a 3 instead of a 2 as the first number. But this hang up is more about perception than reality. I’ll explain why in a moment. For now, the important thing to remember is that those who are waiting to see rates drop again will likely end up paying more the longer they wait.

Let’s begin by talking about why rates are going up. There are a few reasons.

First, the consumer price index released Wednesday showed that inflation was at a nearly 40-year high, with prices for goods and services having risen 7% over the past year. Such a high rate of inflation is a major concern to the Federal Reserve, which had already indicated it would increase interest rates and scale back its bond-buying activity in an attempt to keep the economy on the rails. The Fed may now hike interest rates four times, rather than the previously projected three.

The Fed’s rate hikes would not have a direct impact on mortgage rates, as they tend to follow the direction of the yields on long-term bonds such as the 10-year Treasury Bond. Instead, higher rates will materialize as investors begin to make assumptions about the Fed’s plans for curbing inflation.

Secondly, markets seem to be pricing in continued economic recovery, despite covid cases spiking due to the omicron variant,” said Paul Thomas, Zillow’s vice president of capital markets. “Most indicators continue to point to inflationary pressures, with tight labor markets and challenges in addressing supply chain issues. Market participants appear to be optimistic that the new covid case surge will not be as impactful to economic activity as prior waves.”

Now here’s the really important part. Don’t panic. While the rate increase is real, the impact isn’t as bad as you might think. Up to this point, every $1,000 financed was equal to about $5 worth of a monthly principle and interest payment. Interest rates are normally offered in .125 percent increments. Every incremental increase is worth about nine additional cents for every $1,000 financed. So, it’s literally pennies on the dollar.

I’m not minimizing the potential long-term effect of rising rates. While I agree that increased rates mean that borrowing costs are going up, it’s important to keep some perspective on the actual numbers instead of focusing on the initial fear of missing out on something. Make 2022 your year to purchase a home by calling my team to get pre-approved and to lock your rate. This will give you an advantage and peace of mind for the spring home shopping season.

This weekly Sponsored Column is written by Fountain Mortgage. Located in Prairie Village, Fountain Mortgage is dedicated to educating, and thus empowering, clients to make the best financial decision possible for their situation. Contact Fountain today.

Mike Miles NMLS ID: 265927; Fountain Mortgage NMLS: 1138268