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Mortgages

Anticipating a Mortgage Rate Increase

Credit...The New York Times

The intense media focus on when the Federal Reserve will finally raise its benchmark interest rate above zero can be nerve-wracking for home buyers. Many might be wondering whether they should rush to close on a deal before a move by the Fed causes mortgage rates to climb.

While it might be smart to expedite deals already in the works, those who aren’t quite ready to buy shouldn’t feel pressured. Mortgage rates are influenced by many factors, some of which can be controlled by borrowers to get a better deal.

When the Fed does act, the effect is unlikely to be an immediate spike in mortgage rates, said Jonathan Smoke, the chief economist for Realtor.com. What’s more likely, he said, is a gradual increase in rates totaling around half a percentage point over a 12-month period.

“There isn’t a direct strong relationship between the Fed’s policy action and what rates have been doing,” Mr. Smoke said. “We’ve been at that zero policy level since the end of 2008, and since then the 30-year fixed rate has ranged from 3.31 to a high of 5.59. That’s a pretty broad range independent of what the Fed was doing.”

One could even argue that “rates could stay the same or possibly go down when the Fed moves,” said Bob Walters, the chief economist for Quicken Loans, the online lender. “It’s not as though the long-term rates move in lockstep with the federal funds rate, which is a very short-term rate. And when they do move, the market’s not going to be surprised. A lot of that is anticipated.” (The federal funds rate is the amount banks charge one another for overnight loans.)

So instead of worrying about the Fed, borrowers might do better to concentrate on rate factors within their control. First and foremost is the type of loan they choose. Initial rates are significantly lower on adjustable-rate mortgages, called ARMs, relative to a 30-year fixed, but these loans may not make sense for buyers who plan to stay in their homes for more than five to seven years. As the rate adjusts, it could become less affordable.

One way for home buyers who opt for a fixed-rate loan to drive down their rate is by paying points upfront — essentially prepaying interest. This strategy may make sense for buyers who can afford it and who plan to be in their homes for a long time, Mr. Walters said.

Two other factors that influence rates are credit scores and down-payment levels. Credit scores, in particular, have a considerable effect. On a conventional mortgage, the span between rates offered to borrowers with lower FICO credit scores (in the 600s) versus high (750 or higher) can be as much as a percentage point, Mr. Walters said.

Likewise, loans to borrowers making higher down payments (10 percent to 20 percent of the purchase price) are viewed as less risky and therefore offer lower interest rates. Fannie Mae and Freddie Mac do offer first-time home buyer programs that require just 3 percent down. But “there is a price for that,” Mr. Smoke said. “A higher rate and mortgage insurance.”

Borrowers should also keep in mind that rates vary across lenders because of “all of their individual views of the level of risk and how much business they need to fill their pipeline,” he added. “It pays to shop around.”

At the same time, Mr. Walters said, borrowers should be aware that rates are not static — a phone quote given in the morning could change by day’s end. “Mortgage rates are just like stocks, in that mortgage-backed securities trade all day and rates are changing throughout the day based on what’s happening in the market,” he said. “So home buyers shouldn’t assume it’s a bait-and-switch or a scam when the quoted rate changes in a short period of time.”

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A version of this article appears in print on  , Section RE, Page 10 of the New York edition with the headline: Anticipating a Rate Increase . Order Reprints | Today’s Paper | Subscribe

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