Despite a sharp drop on Wednesday, the S&P 500 ended the week slightly up. On Wednesday, the Federal Reserve Board of Governors voted to raise interest rates by a quarter of a percent. This is pushed out to consumers almost immediately, as credit cards and variable-rate loans will cost more in interest. Savers in a high-yield savings account or money market should also see an increase in the amount of interest they are earning.
What is not an immediate reaction is mortgage rates. Mortgages in the US are based on the ten-year Treasury yield and are currently hovering just under 7%. Given the abnormally low rates we saw after the 2008-09 financial crisis, it may seem an insurmountable rate for someone looking to purchase a home.
The mortgage interest rate peak was set in 1981, with a high of 18.63% in October, and a year-long average of over 16%. The early eighties saw high rates as the Fed fought stagflation and tried to both reboot the economy and bring inflation down.
If you look at long-term averages, instead of the highs, we’re still below the long-term US average of about 7.7%. What the current rates have done is keep people in their homes longer, as downsizing in retirement may not bring a lower payment. And purchasing a bigger home may not be feasible, if you’re looking at both a larger mortgage and a higher interest rate.
If you’re looking at a new mortgage, a good guideline is that housing costs should be about 30% of your overall income. And total debt, which includes car payments and payments on credit card balances you don’t pay off in full each month, should be 40% or less of your overall income. Choosing a smaller home or keeping your car for another year can have an outsized impact on your financial security.
Your action item this week is to schedule your fall HVAC maintenance. Regular maintenance of anything you own helps prevent costly breakdowns and can extend the item’s useful life. While you’re at it, change the filter in your system.
If you have a question you want answered, email us at info@covingtonalsina.com. Be sure to check out our Facebook page or website to see our upcoming educational events.
CovingtonAlsina is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.