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Unemployment Rate Falls to 7.0%, Higher Interest Rates Coming

A better-than-expected jobs report for the month of November is another nail in the coffin of low mortgage rates and deposit rates. This is a mixed bag, depending on whether you are a net borrower or lender, i.e. have a mortgage or own certificates of deposit. At the end of this article are steps you can take to position your finances for higher rates.

November's job report showed 203,000 private sector jobs were created,. Economists polled by Reuters had forecast only 180,000 new jobs. The unemployment rate fell from 7.3 percent to 7.0 percent and analysts were expecting the rate to only fall to 7.2 percent. The last time the unemployment rate was that low was five years ago. With the better-than-expected jobless claims number released yesterday and the good news in the Labor Department's Employment Situation Summary today, all eyes are on the Federal Reserve's next move.

Interest Rates Dependent on What the FOMC Decides in December's Meeting

The Federal Open Market Committee (FOMC) is scheduled to meet on December 17 and 18 to decide economic policy. The main announcement to watch for are any change with quantitative easing and the federal funds rate. The Fed has been buying $85 billion a month in long term U.S. bonds and mortgage-backed securities (MBS) to force long term interest rates lower.

These purchases, combined with a federal funds rate near zero percent, seem to have finally gotten the economy moving again. The question now is when the Fed will taper their purchases and increase the federal funds rate. Analysts differ on when they believe the Fed will start tapering their purchases.

Some analysts expect an announcement right after December's meeting, some say in March and some even believe they won't start until June. At this point, I believe the Fed doesn't even know when they will start and are waiting for numbers on 4th quarter GDP growth. This will put any decision off until early next year when the 4th quarter advance estimate is released on January 30th, 2014.

Higher CD Rates in 2014

We know that CD rates are moving higher in 2014 but the question remains when they'll move higher. Bank CD rates and all deposit rates are dependent on when the federal funds rate is increased. Based on what the Fed has stated recently, the fed funds rate will move higher once the unemployment rate falls below 6.5 percent but there are even some indications that they may wait until the unemployment rate is as low as 5.5 percent. Another possible indicator of change on the horizon may be when the outlook for inflation is above 2.5 percent.

Look for deposit interest rates to start increasing sometime in the second half of 2014. We will see sharp increases in deposit rates just because rates are so low right now. With the current fed funds rate near zero percent, the Fed will have to quickly increase the rate to get it to a neutral level.

We could see a fed funds rate around 2 percent to 3 percent by the end of 2014. This will send the best 1 year CD rates at banks up above 3.00 percent. Variable rate accounts like savings accounts and money market accounts will also see rates above 3.00 percent. Of course, this could all happen quicker if economic growth picks up from current levels and the unemployment rate falls faster than expected.

Higher Mortgage Rates Already Here

Fixed long term mortgage rates have already moved higher since April of this year and will move even higher in 2014. Mortgage rates are tied to long term bond rates, which are subject to market forces.

Bond rates moved 125 basis points higher just on the possibility of the Fed tapering.  This, in turn, sent long-term mortgage rates more than 100 basis points higher in 2013. Now that we are nearing a time when the Fed will actually start tapering, bond rates and mortgage rates will move higher. By the middle of 2014, 10 year bond yields will be over 3.00 percent and possibly go as high as 4.00 percent. 10 year bond rates at 4.00 percent will send 30 year conforming mortgage rates as high as 5.50 percent. By the end of 2014, 30 year rates will be around 6.00 percent. 15 year mortgage rates today are averaging 3.54 percent but will move up to 4.50 percent in the second quarter of 2014 and as high as 5.00 percent by the end of 2014.

Position Your Finances for Higher Interest Rates

Steps to Take Now Before Mortgage Rates and Refinance Rates Increase

There are a few steps you can take to position your finances for higher interest rates. Time is running out to take advantage of near record low mortgage rates to either buy a home or refinance a mortgage loan. Granted, rates are still low historically speaking but if you bought your house within the past 6 years, it probably won't make financial sense to refinance.

The general rule of thumb when refinancing is if you can get a refinance rate at least 1.00 percent lower than your current loan rate, it pays to refinance as long as you plan to stay in your home a few years. The annual average 30 year mortgage rate back in 2006 was 6.24 percent, current 30 year rates are almost to a point that it won't pay to refinance. Since 2006, average 30 year refinance rates have been even lower so the chance to refinance is fading fast.

If you're thinking of buying a home, each 1 percent rise in mortgage rates tacks on another $62.73 for every $100,000 borrowed. So for a $500,000 loan, that is another $313.65 a month in mortgage payments. $300 might not sound like much but it also reduces the total loan amount you can borrow. The income-to-debt ratio for FHA approved loans is also being reduced from 45 percent to 43 percent, further reducing the amount you can borrow.

What to Do Before CD Rates Move Higher

If you're in the market for a certificate of deposit and checking on CD rates, you see how low rates are now. Make no mistake, CD interest rates are moving higher in 2014, so if you want to lock in a rate now make sure to invest in certificates of deposit with terms of 6 months or less.

If you already have money in certificates of deposit, check on the maturity date. This is especially important for longer term CDs maturing. Banks and credit unions will automatically roll your maturing CD into another CD with the same term. The best long term CD rates are so low, it doesn't make sense to lock in a new low rate when interest rates are moving higher next year.
Author: Brian McKay
December 6th, 2013