Jerome Powell has spoken!
Powell Announcement Was Made…HELOCs Will Be Hit First
They are no longer thinking about, talking about or not talking about. They are ready to announce. Fed Chair Jerome Powell let everyone know that as soon as the next meeting in November, the tapering process will begin soon and HELOCs will be hit first. The $120B a month in purchasing of mortgage backed securities and treasuries will wind down starting in December 2021 and finish in July 2022. This taper is faster than what was assumed to be an end of 2022 completion. Immediately after the taper is complete in July, “Lift Off” will commence. What does that mean? Raising Fed Rates which will lead to rising HELOC rates and mortgage rates.
Many think the Fed Rate is mortgage rates or that they directly move them. Indeed, they are related, but not the same.. more like sisters, not twins. I want to explain as this will become more important to understand over the next six to twelve months.
“The Fed”, short for the Federal Open Market Committee (FOMC), includes 12 members of the Federal Reserve and controls the money supply in the US. We have been hearing a lot about the Fed and it’s Chairman Jerome Powell since much of what has been driving the rates so low through this pandemic has been their monetary policy.
One tool the Fed uses to control inflation is the Federal Funds Rate, and the monetary reserves it requires banks to set aside for depositors. As we all have been watching and feeling if we went to buy milk, gas, windows, and lumber.. the cost of things, (i.e. inflation) is up to 4.2% in July.. well above the Fed’s 2% target.
The Federal Reserve requires institutions, banks and credit unions, to set aside money for whenever account holders want to withdraw funds. These funds are called “reserves” and the Fed sets the requirements and ensures banks maintain. Banks borrow monies from the Fed and lend to one another overnight as their cash requirements ebb and flow at what is called the Fed Rate. The Fed does not have the power to change interest rates overall, but it does target the Federal Funds Rate, which trickles down affecting the Prime Rate and eventually other short term rates like car loans and your HELOC rate.
The Prime Rate is what lenders and banks charge their best and most credit-worthy customers. Those who do not fit into that category get a Prime+ Rate.. you’ve seen them… Prime + .25% or Prime + 2.5%. The “plus %” a bank states can be based on credit score, loan to value, property type, length of loan, etc. HELOCs are always tied to the Prime Rate.
When the Federal Funds Rate goes up, so goes the Prime Rate, which in turn causes HELOC rates to increase. Most HELOCs start out as interest only for ten years then flip to a principle and interest 20-year fixed loan at the market rate at that time. Since HELOCs are variable (ie. not fixed) their interest rate can change at any time. These jumps in rate can often leave the home owner in shock and panic as the required minimum payment goes up and locking in at that time is not as advantageous as it was when the HELOC was established.
If you are worried about a move in interest rates, there are a few things you can do:
- Reduce the amount you owe which will in turn reduce the impact
- Convert the variable HELOC to a fixed rate HEloan. This will lock in the rate to the current second lien position market rates. Most HELOCs allow for at least one opportunity to fix your interest rate
- Wrap it into a first mortgage refinance. This option has higher closing costs, but locks in the whole amount (including your current first mortgage) into a 30-year low first mortgage interest rate option. You can even pull more money out at the same time to pay off debt, start a business or purchase another investment property.
HELOC rates have been extremely low.. as have all mortgage rates recently. So taking an immediate action might not seem necessary. However, knowing we are headed into a rising interest rate market, locking in those funds will give you the most stability and security going forward. And of course… if we are all blessed with another run on low rates, you can always refinance again.
Give my team a call to find out exactly how low you can lock in your rate and give yourself a great nights sleep.
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