The cost of borrowing money is going up and sooner or later, it’s likely to filter through to more expensive home loans.
Here’s what you need to know to navigate the changes coming soon — and perhaps even profit.
Government borrowing costs are rising fast. The baseline for all borrowing in the U.S. is what it costs the government. Already the interest rate on the benchmark 10-year bond has crept up from a record low of 1.37 percent in early July to 1.75 percent recently.
But that increase is likely not the end of the matter.
“I think we are going to at least 2 percent on the 10-year (Treasury bonds), maybe a little higher,” says Peter Tchir, head of macro strategy at Brean Capital in New York.
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He sees higher yields ahead as central banks around the world, such as the Federal Reserve and the European Central Bank, pull back from their aggressive money-printing programs, which are also known as quantitative easing. “We’re seeing a little pull back from QE globally, while the market has expected more and more,” he says.
As investors start to catch up with what’s going on, then borrowing costs for the government will rise.
Mortgage costs follow Treasurys. The bad news is that whatever the government pays, we pay more.
Mortgage rates specifically are usually set in relation to the interest rates on 10-year treasury bonds. As its yield rises through 2 percent, you’ll likely see the cost of a 30-year fixed rate mortgage rise as well.
At the time of writing, the current rate was 3.57 percent, according to Bankrate.com. That’s a historically low rate. But for many people every time we’ve been told borrowing costs are as low as they’ll ever be, they then get even lower.
Refinance soon. That begs the question: Is it time to refinance any existing mortgage?
“Most of my clients have big mortgage balances left whether they are young or old,” says Rebecca Kennedy, principal at Kennedy Financial Planning in Denver. “If they want to stay in their home, we talk about refinancing now rather than waiting.”
The question of whether or not someone is intending to stay in their existing house or apartment is important.
If you know you are selling your place soon then it probably wouldn’t make sense. But if your house will be your home for many years then it makes a lot of sense to secure the lowest borrowing costs possible.
What about ARMs? Adjustable-rate mortgages have a borrowing cost that resets periodically. Whether you should switch to a fixed-rate mortgage depends on how long you expect to be in your current home. Borrowing with a fixed interest rate loan may make more sense for people who know they will stay put in the same property for a long time.
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Watch the banks. It’s not just borrowers who will be watching the cost of borrowing. The banks will too. “I would make the argument that when rates go up that it will drag mortgage demand forward due to sense of urgency,” says Brad McMillan, chief investment officer for Commonwealth Financial Network, in Waltham, Massachusetts.
That will be good news for any financial institution that offers mortgages. But not all banks will fair equally. McMillan sees small banks doing far better than the mega-banks.
“They are in a position to cherry pick (to keep the best loans),” he says. The rest would be sold into the so-called securitized mortgage market.
With the exception of the crisis that led to the mortgage meltdown, making home loans has traditionally been a very low-risk proposition for financial institutions. When a bank can pick the very lowest risk loans individually then it becomes an even more profitable enterprise.
Larger banks may be able to do that, but it is also harder for such activity to change the net profits substantially as the company gets larger and larger.
Where the winners live. One place to find the potential winners is the PowerShares KBW Regional Bank exchange-traded fund (ticker: KBWR), which tracks the KBWR regional bank index. It includes such stocks as Valley National Bancorp ( VLY) and Bank of Hawaii Corp. ( BOH), as well as many others.
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Because such banks are regional they tend to be exposed to regional economies. That factor will also be an important matter in deciding whether to invest in such stocks individually, rather than collectively such as through the ETF.
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What Rising Government Bond Rates Mean for Your Money originally appeared on usnews.com