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Rising Mortgage Rates & The Child Tax Credit
What’s going on with mortgage rates? Did you know that interest rates for mortgages have gone up? In some instances, it is increasing by .5% and in others as much as 1%. One of the reasons that interest rates are going up is that the Fed will no longer be buying mortgages come March. You may not have known that the Fed has been the biggest buyer of mortgages since the beginning of the pandemic. Their purchasing of mortgages has helped to keep rates low. But when that demand is removed, rates will begin to tick up in order to entice new buyers of those mortgage bonds to step into the void. As of today, mortgage rates are averaging between 3.5% – 4% for 30-year mortgages and right around 3% for 15-year mortgages. Of course, that depends on your credit and how much you are able to put down. Just to give you an idea on how this increase in rates can affect your payment – let’s say you have a $200,000 mortgage paid for over 30 years. You’d pay $843 in principal and interest if you had a 3% rate a few months ago. In today’s market if you got a 4% rate you’d be paying $955 in principal and interest. That’s a little more than a $100 per month difference with the recent increase in rates. For some buyers in today’s market, slightly higher rates will cause them to look for a little less expensive house to keep the monthly payments closer to what they can afford. For others with higher incomes, it won’t make a huge difference. Overall, however, higher rates will decrease demand to some extent for new houses. At current levels, it may not cool the housing market, but it may soften it just a bit.
Home prices may continue to go up this year – but not likely at the rate they did last year. The Fed is trying to walk a tightrope of raising rates enough to slow down inflation while at the same time not pushing the economy into recession because they went too far. This is almost impossible to accomplish – especially considering that economies are always going to be cyclical, and recessions are eventually inevitable – no matter what the Fed does. A scenario that could play out is that the Fed raises rates methodically through this year and possibly into the next, only to find it pushing the economy into recession somewhere on the other side of those rate increases. The Fed has historically gone too far, and even though this particular Federal Reserve is very aware of this tendency, they are prone to repeat the same pattern – as no one truly knows how much of an increase in rates will be just enough. Well, what are the implications of these increasing mortgage rates for your decision making?
For your personal finances be careful not to buy more house than you can afford. Stretching your income limits through large mortgage payments while times are good can put you in a really bad position when times are tough. You need a margin of safety there. And if you don’t have to move – maybe you shouldn’t. Consider doing renovations to your existing home rather than moving, especially if you have a great deal of equity in your home that you could leverage through a cash-out refinance or a second mortgage.
For your small business owners – continue looking for ways to use your earnings to reduce your debt load. We are at least in the mature phase of this economic expansion where you can use your profits to reduce your overall risk load. A recession does not appear to be immediately over the horizon, but the decisions you make now can help set you up to weather the next recession better whenever it does come. Any debt that you do utilize needs to be smart and incredibly strategic, and something that is ultimately going to put you a better position long-term.
Let’s switch gears and talk about the future of the Child Tax Credit. The Child Tax Credit will be front in center in legislative squabbles this year. The expanded credit that we saw in 2021 expired at the end of last year. What is at stake is whether families will continue to receive $250 to $300 per month per child, depending on their age, who do not pay taxes. You see, previously the credit was only available for people who paid taxes, not to mention it was a smaller amount that was given at tax time in the form of a refund. But the expanded credit that was available in 2021 was for everyone under certain income limits, regardless of whether they paid taxes or not, and it was advanced on a monthly basis rather than waiting until tax time. So, a low-income family who did not pay any taxes in 2021 with 4 kids could have seen its income increased by at least $1,000 per month, or $12,000 over the course of the year. This is a really large increase in resources on a percentage basis. Some in Congress want to continue this benefit, others want to continue it but pull funding from other programs to pay for it, while others are against the benefit all together. You are going to see a lot of conversation around this particularly in the early part of 2022. Regardless of whether this benefit is continued or not, it is clear that this benefit created more resources to be spent in 2021, leading to increased demand for both goods and services. If it is not reinstated, this reduces some measure of spending in 2022 and is one of many reasons that the economy is likely to downshift in some measure this year.
If you are a small business owner, don’t be surprised if sales are slightly down from last year, particularly if you see products. If this credit is not reinstated there will not be as much disposable income in the system, so temper your expectations for revenue for the coming year. It could still be a good year – but perhaps not as good as last year.
For your personal finances, don’t assume this credit coming back – it may or may not. If it does, use it to increase your emergency fund, pay down debt, or save it for the future. Treat it as gravy and not the meat and potatoes of your financial plate – especially since it isn’t a given.
At McKenzie Banking Company and Foundation Bank we love to help people make good financial decisions. One of the things people struggle through in this environment is how to buy houses well. We offer a unique solution we call our Home Sweet Home Loan which features local decision making, local processing, and local service on the other side of the closing table. If you are in the market to buy a house or know someone who is, you should really reach out to see how we can help. If you’ve found this podcast helpful, we hope you will share it with your friends and family and subscribe on your favorite podcasting app. Until next time… God bless. – President Chad P. Wilson, CFP
Today’s episode of “Money Matters” was written and recorded by President Chad P. Wilson of McKenzie Banking Company / Foundation Bank on February 1, 2022. This episode does not constitute financial advice. Please consult a financial professional to discuss your specific needs. MBC/Foundation Bank is an Equal Housing Lender, Member FDIC.