To understand how interest rates will change in the future, let’s look at the trends we’ve seen since 2010: Interest rates fell to historic lows, and buyers enjoyed those low rates on new mortgages. Rates bottomed out at an average of 3.66% in 2012, then rose only slightly in the years since. In 2015, the annual average rates rested at 3.85%.
What’s next? Interest rate predictions for 2016 initially said we’d finally see them start rising again. But several events have changed that outlook. Between the surprising Brexit vote and the tumultuous presidential election cycle, homebuyers need to look at re-evaluated interest rate predictions before locking in a mortgage.
To guide buyers for the rest of 2016 and beyond, we turned to financial experts — from New York, NY, to Los Angeles, CA — to share their insights, predictions, and best educated guesses. If you’re looking to buy a home soon, check out what interest rates could look like on your mortgage.
1. Predicting interest rates can help strengthen your strategy
Predictions are just educated guesses, and relying on a guess isn’t wise. But there’s still a lot of value in making these predictions. “It can help us think through what we might do if the interest rates go up, down, or sideways,” explains Meg Bartelt, MSFP and founder of Flow Financial Planning. “This makes our plan stronger and more resilient.
“Good financial planning encourages us to take action on the things we can control and to make sure our plan can survive whatever happens that we cannot control,” Bartelt says. “In this case, it’s interest rates and the reaction of the market.”
2. Interest rates seem unlikely to rise anytime soon
“Interest rates will stay lower longer than most people would imagine,” says Kirk Chisholm, principal of Innovative Advisory Group. “There is disinflation and deflation in many parts of the world, many developed countries have negative interest rates, and the U.S., being the world’s reserve currency, is in no position to raise rates dramatically.”
Chisholm points out that there is not much room to raise positive interest rates. “It is highly improbable that 10-year Treasury interest rates will rise above 3% in the near future,” he says.
Joseph Hogue agrees that interest rates aren’t rising anytime soon. “There is more than $13 trillion in sovereign bonds globally with negative yields, a little over a third of the market,” he explains. “The Fed can change short-term rates through the federal funds rate. But the long end of the yield curve — which affects long-dated debt like mortgages — will stay low for a very long time.”
Hogue, who runs the financial education site Peer Finance 101, notes that the Fed will raise rates eventually. But when they do, there are a wealth of overseas investors who will buy U.S. Treasuries. “[These are] one of the few sovereign bonds that pay a positive yield, so rates will stay low,” he says.
3. Prepare for when interest rates do rise
“Commentators have been saying that interest rates will rise for the last six or seven years, and it hasn’t happened yet!” says Daniel Frankel, CFP and founding principal of Wealth Collab. He notes that it’s easy to say interest rates will rise. But determining exactly when is the tricky part.
“When interest rates do rise, they could do so very quickly,” he explains. “The markets are economic prediction engines. If expectations change, the market will react before you have time to adjust course.”
Frankel says for long-term buyers, locking in a low-interest-rate mortgage today makes a lot of sense. “Don’t assume you have time to wait. Don’t try to wait for mortgage rates to drop another 0.25%,” he advises. And most importantly? “Don’t get an adjustable-rate mortgage thinking that you can refinance into a fixed rate later.”
Eric Lai, a financial planner with Archvest Wealth Advisors, says it’s important to remember that when the Fed raises the rate, it affects only the rates today. “Longer-term rates such as the 10-year Treasury are determined by the marketplace, or the supply and demand for Treasuries,” Lai says. Mortgage rates, he notes, are most highly correlated with the 10-year rate.
4. Interest rates shouldn’t drive your purchase
“It’s entirely possible that the Federal Reserve will begin raising interest rates in December if they decide against raising them during their September meeting,” says Erik Klumpp, CFP and founder of Chessie Advisors. But as other experts have hinted at, that doesn’t mean you need to take drastic action if you want to buy a home.
“Interest rates shouldn’t be the main factor for anyone looking to purchase a home,” Klumpp says. “Even if rates were to increase 0.25% or 0.50%, we’re still at or near historically low mortgage rates. For someone looking to purchase a home for the long term, it’s a terrific time to buy.”
5. Consider other factors before you buy
Instead of just going by interest rates to make a buying decision, Klumpp suggests, look at other factors. He advises having money saved for a down payment, making sure your budget can handle a monthly mortgage payment, and deciding if you want to stay in the same location for a minimum of five years.
Erik Kroll, a CFP who founded the financial planning firm Hilltop Advisors, agrees: “Even if you think that rates will go up, you shouldn’t feel it’s now or never, or that you will save money in the long term by buying before rates rise. Rates may not go up, meaning you still could have gotten a relatively good deal if you waited.”
Instead of running calculations on interest rates, Kroll says, you should look at some other costs: the price of the house, ongoing maintenance, taxes, homeowners insurance, and even things like extra furniture and other household items. Don’t focus on just one factor like interest rates. Evaluate the entire picture to determine whether now is the right time for you to buy.