The Federal Reserve raised interest rates three times in 2022. You might not feel the effects of these rate hikes immediately, but they may stretch your already tight budget later in the year and affect your ability to get a mortgage or keep your home.
Here’s what you need to know if you live in Rancho Cucamonga and have an adjustable-rate mortgage or have missed one or more mortgage payments, including:
- What is the Federal Reserve?
- How does it control inflation?
- How do higher interest rates affect mortgages?
What is the Federal Reserve?
By now, you have probably heard about “the Fed raising interest rates.” However, it may not be clear what the Fed is, why it’s raising interest rates, and how it will affect you.
The Federal Reserve is the country’s central bank. Congress created it as part of the 1913 Federal Reserve Act, to help prevent another economic depression. It is a lender of last resort, ensuring a cash reserve and helping regulate Wall Street.
According to the Council on Foreign Relations, its mandate is to manage the monetary policy by regulating the financial system and achieving full employment (keeping the unemployment rate near or below 5%). This is a fancy way to say, “keeping prices stable and Americans employed.”
With few ties to Congress, it acts independently to achieve its goals. It does this by:
- Controlling the supply of money in the economy
- Making asset purchases to boost financial markets
- Setting interest rates
Since 2020, prices have skyrocketed, threatening the stability of the economy. To bring the market back into balance, the Federal Reserve is using its primary tool to impact inflation – Raising the interest rate banks charge each other for overnight loans. While the Fed doesn’t control all interest rates, other lenders typically follow by raising their rates, including those for:
- Home equity lines of credit
- Credit cards
- Adjustable-rate mortgages
- Automobile loans
Banks often need to borrow money, the same as you do. While you may need a loan to buy a car or a home, banks need to replenish their reserve. This means keeping a certain amount of cash on hand so that they can continue to make loans to consumers and businesses. The Federal Reserve charges banks an interest rate for these funds. Banks, in turn, use the Prime Rate as the basis for the methods they use when setting the interest rates on various types of loans.
How Do Higher Interest Rates Affect Inflation?
Although the reasons for the current economic environment are complex, it comes down to supply and demand: There was a lot of demand and not enough supply. When demand is strong, and supply is weak, prices rise. This is true for everything from crude oil to microchips to grain and lumber.
The higher the interest rate, the more expensive the product. Theoretically, consumers spend less when they carry a balance on credit cards or borrowing money is too costly. Less spending results in lower demand, and eventually, the prices come down to meet consumer needs.
How Does Inflation Affect Homebuyers?
A healthy housing market involves a delicate balance between affordability and profitability. An overpriced or inflated market can be great for sellers, but only if they can sell the property for at least the value of the mortgage. If there are few buyers, the abundance of homes for sale might result in a stalled market. For the banks to make money, consumers must be able to get loans and afford the payments. Soaring interest rates could seriously affect your ability to buy a home.
For example, let’s say you’ve done your budget and can afford $1,500 for a mortgage. If the interest rate is 4%, with 20% down, you can afford a house selling for approximately $314,000. However, if the interest rate is 4.5%, you might only be able to afford a $296,000 home. This scenario works only if you have good credit and debt-to-income ratio.
If your creditworthiness is average or less, the interest rate could skyrocket. Some financial experts anticipate mortgage rates will surpass 5% and soar to 7% for some potential buyers by the end of 2022. The July 2022 Fed increase to 4.75% means that where you can afford to buy a home in or near Rancho Cucamonga, CA, is limited.
What Are Homeowner Options for Mortgage Relief?
As interest rates on credit cards and the cost of groceries and utilities rise, your paycheck likely won’t go as far as it used to, potentially causing you to miss monthly mortgage payments. If you have an adjustable-rate home loan, a 0.5% increase could increase your monthly payment by hundreds of dollars, overnight.
Mortgage refinancing and loan modifications are two of the most common ways to get mortgage relief in Rancho Cucamonga. Refinancing replaces your current home loan with a new one, while loan modifications change the terms of your existing home loan.
If you have good credit and a steady income, it may make sense to refinance with your existing lender or a different lender. This is a new loan, with new terms and interest rates. Most homeowners “put down” a percentage, just as they did with the initial purchase. It lowers the principal and may include moving from a 15-year mortgage to a 30- year payment plan, which can significantly lower payments.
A loan modification is a tactic used to avoid foreclosure. It changes the terms of your existing home loan to decrease your monthly payments. It may:
- Lower the interest rate
- Move a variable rate to a fixed rate
- Increase the length of the loan
- Recapitalize arrears
Depending on your specific situation, it may also include a principal reduction. A loan modification may make sense if you are behind on your monthly payments or underwater on your mortgage. Servicers typically only approve modifications as a final measure to prevent foreclosure.
Get Rancho Cucamonga Mortgage Relief Help
If you are at risk of missing or have missed mortgage payments and the rates are high (or higher) than when you purchased your home, you may qualify for a loan modification. Unlike refinancing, a mortgage modification changes the terms of your existing loan. As interest rates increase, banks may receive fewer requests for new home loans. Less business for the bank could make it harder to get a modification.
You must submit a hardship letter detailing the factors contributing to your request, including:
- Medical bills
- Loss of income or unemployment
- Divorce or separation
- Increased living expenses
- Death of a family member
Submit documents that back up your letter, such as pay stubs, loan agreements, credit card and bank statements, investment reports, etc. The process might take hours to complete. If your situation is complex, make sure you understand the ramifications of a modification before you sign the paperwork.
Terrence Fantauzzi is a locally known and respected attorney. Not only is he familiar with Rancho Cucamonga debt relief options, he understands how hard it can be to make ends meet. Call 909-552-1238 to schedule a free consultation. Let him help you determine your best options and remove some of the stress by walking you through the process.