21-Jun-17 – On June 14, the Federal Reserve’s Open Market Committee voted to raise the federal funds rate – what banks charge each other for overnight loans – by a quarter of a percentage point to a range of 1 to 1.25 percent.

This is the second time the Fed has raised rates in 2017, and at least one more rate hike is forecast for this year because the nation’s job market is improving and inflation is on the rise, economists say.

Rates on one-year adjustable-rate mortgages (ARMs) are modified annually based on short-term interest rates. So, if your ARM rate currently is 4 percent, the three quarter-point Fed hikes in 2017 likely would push the loan rate to 4.75 percent when it adjusts in 2018. That rate jump would boost the monthly payment on a $200,000 loan by $84.

With interest rates on the rise, holding on to an ARM loan is not a good idea. The Fed is forecasting three more rate hikes in 2018, and three or four increases in 2019. If each increase is a quarter of a percentage point, theoretically that 4 percent ARM loan could be adjusted upward three times to 6.5 percent, driving up monthly payments by more than $250 on that $200,000 mortgage by 2020.

Because 30-year fixed-rate mortgages are pegged to 10-year United States Treasury bond interest rates, they are only indirectly affected when the Fed increases its short-term federal-funds rates.

However, on June 15, the day after the Fed’s rate hike, benchmark 30-year fixed mortgages rose to an average of 3.91 percent from 3.89 percent a week earlier, reported Freddie Mac’s Primary Mortgage Market Survey. A year ago, 30-year fixed loans averaged 3.54 percent.

15-year fixed mortgages averaged 3.18 percent on June 15, up from 3.16 percent a week earlier. A year ago, 15-year fixed loans averaged 2.81 percent.

30-year fixed mortgage rates generally have moved below 4 percent in recent weeks. On March 9, the benchmark rate hit 4.21 percent, the highest mark of 2017, reported Freddie Mac.

With interest rising at the end of 2016, homeowners seized the opportunity to refinance their mortgages, locking in fixed-rate loans.

Some 883,836 refinanced loans totaling $246 billion were originated in the fourth quarter of 2016, reported ATTOM Data Solutions’ U.S. Residential Property Loan Origination Report. That’s a 20 percent increase in loans, and a 27 percent hike in dollar volume from the previous year.

More than 3.3 million refinances and over 2.7 million home purchases were originated in all of 2016, according to the report.

Interest rates are going up

As inflation moves steadily toward the Fed’s annual 2 percent target, Fed Chair Janet Yellen said rate hikes will probably come at a faster pace in 2018 and 2019.

Some economists have predicted that 30-year home loan rates could rise as high as 4.5 percent by the end of 2017. However, if inflation heats up, rates could exceed that level. 30-year fixed-rate loans could hit or surpass 5 percent in 2018, some analysts say.

Because lenders expected the Fed to raise interest rates in mid-June, the hike may already be priced into the current yield on the 10-year U.S. Treasury bonds. A likely scenario is that rates will trend gradually higher during summer and autumn.