PERSONAL FINANCE

Fed rate hike: What it means for mortgage rates

Hal Bundrick, CFP

NerdWallet

As expected, the Federal Reserve raised its key interest rate Wednesday -- the second time since December.

Fed rate hikes could have a modest effect on mortgage rates.

If you’re a current or would-be homeowner, you shouldn’t feel rushed into action. But the Fed’s action, and the anticipation that it will raise rates again in the coming months, has important implications for mortgage rates, as well as your ability to buy a home or refinance your loan.

What happened after the 2015 Fed rate hike

Rates on 30-year fixed-rate mortgages averaged 3.97% prior to the Fed rate hike on Dec. 16, 2015, according to Freddie Mac. Many experts predicted they’d move higher, but after briefly touching 4% just before the end of 2015, rates retraced their steps through 2016, falling below 3.5% in July through October.

And then came the presidential election. Every mortgage rate forecast flew out the window when rates soared above 4%.

The Fed can’t trump Trump

Nothing moves mortgage rates like a surprise presidential-election outcome — not even the Fed. Brad Hunter, chief economist for HomeAdvisor, a home improvement referral site, has expected two or three additional Fed rate hikes in 2017, and that mortgage rates would only gradually move higher throughout the year.

How to position your portfolio for rate hikes

However, Hunter has said there are three things that could lead to a faster-than-expected increase in interest rates, and they all involve the presidency of Donald Trump.

1. Trump might appoint a new Fed chair. As president, Trump is able to appoint two governors to the Federal Reserve Board and replace Chair Janet Yellen when her term ends in early 2018.

During the campaign, he said that the Fed had been holding interest rates at abnormally low levels. And if he builds a Fed that takes a more aggressive and activist approach to monetary policy, that would increase the likelihood of higher interest rates.

“On the other hand, Mr. Trump has also said that he ‘likes’ low interest rates, so his ultimate course of action on this matter is unclear,” Hunter said.

2. Trump might cut taxes. That could result in higher budget deficits, especially combined with his infrastructure spending plans.

“A higher budget deficit would force more bond issuance, which would tend to push bond prices down and interest rates higher. Also, if the fiscal stimulus causes the economy to accelerate, that could mean additional upward pressure on rates,” Hunter said. “And in this circumstance, the higher rates would be a reflection of positive news rather than negative.”

3. Trump might renegotiate the federal debt. Trump has floated a few ideas, including buying existing U.S. Treasuries at a discount. That debt would have to be retired — or replaced with lower-interest new bonds — in effect refinancing the debt. He also mentioned “renegotiating” federal debt, a move just short of defaulting on what have been the world’s most secure bonds.

Trump has since backed down from these proposals. But “If such an unprecedented event were to happen, investors worldwide would suddenly start to view our debt as risky, demanding to be paid a higher rate of interest,” Hunter said. “That would in turn further add to the deficit. Long-term rates, including mortgage rates, would go up.”

2017 housing and mortgage rates

Barring such events, forecasters predict a trade-off: Rising mortgage rates will be accompanied by an improving economy and the potential for higher wages.

Freddie Mac said late last year that it expected to see “some additional interest rate increases following the recent movements.” The company, which provides capital to the mortgage market by buying mortgage loans from lenders, predicted 30-year mortgage rates would average 4.2% at the end of 2017.

Fed rate hike: 7 questions (and answers)

A forecast for 2017 from TransUnion, the credit analytics company, predicted that lower unemployment rates and a growing median household income would allow more first-time homebuyers to enter the market this year.

“We believe with improved economic conditions we could see nearly 3 million first-time homebuyers in 2017,” Joe Mellman, vice president and mortgage line of business leader at TransUnion, said in the forecast.

And in 2017, would-be buyers and mortgage refinancers should still have the benefit of historically low interest rates — perhaps combined with improving personal finances.

Hal Bundrick is a staff writer at NerdWallet, a personal finance website. Email: hal@nerdwallet.com. Twitter: @halmbundrick.