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For the past two month or so investors have been concerned about how impending interest rate hikes would impact business revenue and investor profits. With all the worry over just how aggressively the Fed will hike rates it seems likely that there will be a stall in the treasury market causing mortgage rates to rise before the impending Fed hike that could take place any day now.
That said it seems likely that rates will surge at significantly high levels in the days and/or weeks to come. What will the outcome be?
One senior economist says Americans are carrying a lot of debt and much more of it will be exposed when rates rises. 50 percent of new mortgages outstanding were Adjustable Rate Mortgages. As a result almost one quarter of total household debt would be affected instantly by higher rates, more than 70 percent higher than the exposure rate seen in 1994.
Rising rates will impact households by reducing buying power and less spending. The good news is that not all home loan borrowers opted for adjustable rate mortgages. A number of new home buyers and those refinancing their home loans saw the hand writing on the wall and looked for fixed rate mortgages.
Fixed rate mortgages are the most common type of mortgage program. Monthly payments for interest and principal never change. Fixed rate mortgages are available for 30 years, 20 years, 15 years and even 10 years. Home loan borrowers prefer fixed rate mortgages as these allow them to budget their funds better knowing how much they will be putting out on mortgage payments month to month and year to year.
Fixed rate fully amortizing loans have two distinct features. First, the interest rate remains fixed for the life of the loan. Secondly, the payments remain level for the life of the loan and are structured to repay the loan at the end of the loan term.
During the early amortization period, a large percentage of the monthly payment is used for paying the interest . As the loan is paid down, more of the monthly payment is applied to principal. Homeowners will strive to pay down the mortgage by adding additional mortgage payments as time goes by.
Adjustable-Rate Mortgages (ARM's) are mortgages where the interest rate is not fixed, but changes during the life of the loan in line with movements in an index rate. You may also see ARMs referred to as AMLs (adjustable mortgage loans) or VRMs (variable-rate mortgages).
Why do interest rates change? Interest rates change in response to a number of things: changes in supply and demand of credit, Federal Reserve policy, fiscal policy, exchange rates, economic conditions, market psychology and, most important for the bond market, changes in expectations about inflation. That said, any news that may indicate a need to control inflation by hiking interest rates will impact both the stock and treasury markets and therefore the cost of products and services as well as some taxation issues.
During the 3 year refinance wave which recently receded borrowers wisely opted to move out of an ARM program and into a fixed rate mortgage program simply by refinancing their current home loan. A spokesperson for the MortgageLoanSearch Network at http://www.mortgageloansearch.cc encourages mortgage rate shoppers to give serious thought to economic conditions, the current Fed stance on interest rate levels and personal budget issues when determining which loan program is best.
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