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Why the Latest Jobs Numbers Could Make Buying a Home More Expensive

The U.S. economy is starting to fire on all cylinders, especially on the unemployment front.

According to the U.S. Labor Department, the unemployment rate fell to 3.8% in May, its lowest level in 18 years. There was a net increase of 223,000 jobs last month across the key industries like manufacturing, healthcare, and transportation.

That’s all good news and economists are increasingly bullish on U.S. economic prospects going forward (The Atlanta Federal Reserve’s GDPNow economic indicator pegs second-quarter gross domestic product growth at a whopping 4.5%, as of the first week of June.)

But could all that cheery economic growth make it tougher for Americans to buy a home?

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After all, a booming economy often triggers a subsequent hike in interest rates, as the Federal Reserve looks to control inflation as the nation’s financial picture brightens. Higher rates from the Federal Reserve usually lead directly to higher bank lending interest rates, which drives up the total costs of home mortgage loans. (The Fed’s rate-setting body is widely expected to raise rates for the seventh time since late 2015 at its policy meeting on Wednesday.)

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“Higher mortgage rates are the typical likelihood going forward,” says Craig Lombardi, president of the online division at Guaranteed Rate, in Chicago, IL. “For years industry experts have taught us to believe that mortgage rates rise with the strength of the economy.”

Home loan borrowers may find it ironic that when their 401(k) or other investment accounts are doing well, mortgage loan rates will rise, as well. But it’s all how you view the situation that really counts, Lombardi states.

“The key is really looking at the issue in three key parts,” he notes. “How much will rates rise, over what period of time, and how does that impact, you, the borrower? Rates do not typically meteorically rise, and home loan borrowers should know that.”

The real-world outcome of any small mortgage rate hike usually isn’t enough on its own to stop most people from pursuing a home mortgage loan. “Right now, for every one-eighth of a percent in interest rate added to a home loan, we’d spend $19 per month more or less to the loan, based on a 30-year fixed rate loan of $250,000 at 4.375% vs 4.5%,” Lombardi adds.

How far will mortgage rates rise (they currently average about 4.80% for a 30-year fixed loan) if the economy keeps getting better? That’s largely a question with an unknowable answer, as there is no guarantee of how the U.S. economy will actually perform going forward, although estimates are on the rosy side.

The best guest, experts say, is a moderate hike in mortgage rates over the next 6-to-9 months, given current economic trends.

“The current low unemployment numbers will have a direct impact on raising rates further with the Federal Reserve continuing their slow but methodical raising of the borrowing rates,” says Ralph DiBugnara, senior vice president of Residential Home Funding in New York City.

Since interest rates have mostly been rising all of 2018 already, DiBugnara doesn’t think home loan borrowers will see a drastic change in rates, but they will see a continuance of the interest rate range the home loan market is seeing now.

That said, there will be a noticeable hike in rates if the economy keeps on barreling forward down the road. “By the end of 2018 and beginning of 2019, we will most likely see the average mortgage interest around 5.50%,” he notes.

With most loan rates under 5% right now, home mortgage borrowers may not want to run the risk of rates going much higher.

Hence, expect a busy summer home-buying season as borrowers look to lock in lower mortgage rates right now before they rise significantly higher, thanks to Uncle Sam flexing his economic muscles.

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Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer, or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.