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What Greece’s Imminent Debt Default Means for Canadian Mortgage Rates – Monday Morning Interest Rate Update (June 29, 2015)

by Dave Larock

Mortgage Rate ConceptIt took longer than many people expected but it now appears likely that Greece will begin to default on its loan repayment obligations tomorrow (June 30).

This is the day that Greece is required to repay a loan of €1.5 billion to the International Monetary Fund (IMF). After failing to agree to the reforms required by its creditors for another extension of its existing repayment terms, the country must either pay up, which it can’t, or default. In anticipation of this default, the European Central Bank (ECB) has just cut off Greece’s access to further funds from its Emergency Liquidity Assistance (ELA) facility, which had pumped an estimated €1 billion into Greek banks since the start of this year and had basically kept Greece’s financial system afloat during that period.

In anticipation of the coming chaos, the Greek government has just told the banks to stay closed until July 7. In the meantime, they will hold a national referendum on July 5 to ask voters to decide whether to accept new bailout terms from its creditors and to agree to the additional austerity measures that will accompany them or to default and turn their backs on the euro zone. read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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What the U.S. Federal Reserve’s Current Economic View Means for Canadian Mortgage Rates – Monday Morning Interest Rate Update (June 22, 2015)

by Dave Larock

Mortgage Rate ConceptInvestors held their collective breath last Wednesday as they waited to learn whether the U.S. Federal Reserve would raise its short-term policy rate (called the “funds rate”) above 0% for the first time since December 2008.

The Fed funds rate is the single most important interest rate in the global economy. It is the Fed’s main monetary policy tool for controlling U.S. inflation and growth rates because it serves as the base rate on which all other U.S. interest rates are priced, either directly or indirectly.

Given that the Fed funds rate has a profound influence over the U.S. economy, which, along with China, has been the world’s main economic growth engine for decades, and given that bond yields in many other countries are significantly influenced by U.S. bond yields, any change in the Fed funds rate initiates a cascading impact that permeates throughout the global economy.

This impact is keenly felt in Canada, where our Government of Canada (GoC) bond yields have moved in lock step with their equivalent U.S. treasury yields since the start of the Great Recession. This is why anyone keeping an eye on Canadian fixed mortgage rates should keep a watchful eye on the Fed’s policy guidance.

The continued improvement in U.S. economic data has convinced many investors that the Fed will finally start raising its funds rate at some point in 2015 and the Fed has, at times, helped foster this view through its carefully worded ongoing commentary. But does the Fed really want to raise rates, or does it just want to plant enough concern in investor’s minds to dissuade them from making risky, speculative bets based on a lower-for-longer view that might ultimately threaten the stability of the U.S. financial system? After all, this isn’t the first time since 2008 that markets have expected the Fed to raise the funds rate, and each time, at the eleventh hour, the Fed has stayed its hand and instead, adjusted the targets it uses to determine when monetary policy tightening will be appropriate. (The Fed is not only in charge of the interest-rate ball … it also owns the goal posts.)

Again last week, the Fed left its funds rate unchanged, and when I read Fed Chair Yellen’s most recent post-meeting press conference commentary I continued to find plenty of hints that the Fed has no plans to raise its funds rate for as long as it can delay and still maintain its credibility.

Here are some examples of Fed Chair Yellen’s comments that lead me to that view (with my comments in italics): read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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What Keeps the Bank of Canada Up at Night – Monday Morning Interest Rate Update (June 15, 2015)

by Dave Larock

Mortgage Rate ConceptLast week the Bank of Canada (BoC) issued its latest biannual Financial System Review (FSR), which gives us a summary of where the Bank sees “the main vulnerabilities and risks to the stability of the Canadian financial system”.

The FSR should be of interest to anyone keeping an eye on mortgage rates because it highlights the potential weaknesses in our financial system that could ultimately lead to changes in the BoC’s monetary policy, and potentially fuel a rise in bond market volatility that would trigger higher borrowing costs, if left unchecked.

This particular FSR report was even more relevant to Canadian mortgagors because two of the BoC’s three biggest areas of concern relate directly to residential mortgage borrowing. Specifically, the Bank’s top three worries are:

  • Overall levels of household indebtedness
  • Overvaluation in key Canadian housing markets
  • Illiquidity in fixed-income markets and investor risk taking

Today’s post will provide a summary of these risks and a detailed explanation of the overlapping vulnerabilities that could exacerbate them (and in so doing, affect our mortgage rates). read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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The Bank of Canada Wants the US to Raise Its Policy Rate – When Will This Happen? Monday Morning Interest Rate Update (June 8, 2015)

by Dave Larock

Mortgage Rate ConceptNo one would be happier than the Bank of Canada (BoC) to see the U.S. Federal Reserve raise its short-term policy rate (often referred to as the U.S. federal funds rate). Here’s why:

  • The BoC is concerned about our slowing economic momentum, which was confirmed most recently by our weaker-than-expected first-quarter GDP decline of 0.60%. Despite this, the BoC is reluctant to cut its overnight rate in order to stimulate our economy because it is also concerned about our record-high household debt levels, which it has long called the “biggest risk” to our domestic financial stability.
  • If the U.S. Fed raises its short-term policy rate and the BoC leaves its equivalent overnight rate unchanged, the Loonie will weaken against the Greenback. This will give our exporters a competitive boost in U.S. markets, where about 80% of our total exports are sold.
  • While Canadian monetary policy is tightly linked to U.S. monetary policy, right now our overnight rate stands at 0.75%, while the Fed funds rate hovers in the 0% to .25% range. That gives the BoC a buffer where the U.S. Fed can raise its policy rate without compelling the BoC to do the same.

For these reasons, a rate hike by the U.S. Fed would hit the sweet spot for the BoC because it would give a boost to our exporters while not impacting the appetite of Canadian consumers for more credit. Of course, none of this matters to the Fed, which will operate on its own timetable when deciding on when to begin tightening U.S. monetary policy. The BoC can only hope that it will do so sooner rather than later.

Which brings us to the question that is on everyone’s mind these days: When will the Fed finally decide to raise its policy rate?

Today’s consensus view is that the Fed will begin to tighten U.S. monetary policy at some point this year. The Fed holds press conferences after its June and September meetings but not after its July and October meetings, and most industry watchers expect the Fed to raise its policy rate at a meeting that includes a press conference. As such, the betting right now is on September … if the Fed does end up moving this year.

Here are the arguments for and against the Fed tightening its monetary policy soon: read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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The Bank of Canada Serves Up Its Latest Economic View With A Dash of Hope Sprinkled On Top – Monday Morning Interest Rate Update (June 1, 2015)

by Dave Larock

Mortgage Rate ConceptLast week the Bank of Canada (BoC) announced that it would leave its overnight rate unchanged, as was almost universally expected. This matters to anyone in the market for a mortgage because all of our variable and fixed mortgage rates are priced either directly or indirectly on the overnight rate.

The BoC also offered its latest insights into how both the Canadian and U.S. economies are progressing. Here are my five key highlights from that statement: read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Will the Latest Inflation Data Impact the Bank of Canada’s Monetary Policy? Monday Morning Interest Rate Update (May 25, 2015)

by Dave Larock

Mortgage Rate ConceptStatistics Canada released its latest inflation data last Friday and it showed our Consumer Price Index (CPI) growth slowing to 0.80% in April (as compared to 1.2% in March). Not surprisingly, this slowdown in year-over-year inflation was led by another 13.5% drop in energy prices, which followed a 10.4% decline for that category in March.

Stats Can also provides us with a more refined measure of inflation, which strips out volatile CPI inputs like food and energy, called core inflation, and momentum in this category also slowed to 2.3% in April (as compared to 2.4% in March).

The CPI data act as important gauges for anyone keeping an eye on Canadian mortgage rates because the Bank of Canada (BoC) will adjust its overnight rate, on which both of our variable and fixed mortgage rates are either directly or indirectly priced, to ensure that our economy maintains overall price stability.

With that in mind, here are my key takeaways from the latest CPI data, along with some other related thoughts as we look toward the BoC’s next policy-rate announcement this Wednesday: read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Mortgage Video Links: The Variable-Rate Mortgage and Sub-Prime Lending in Canada – Tuesday Morning Interest Rate Update (May 19, 2015)

by Dave Larock

Mortgage Rate ConceptI hope you enjoyed a relaxing long-weekend break.

Today’s post contains video links to a couple of interview segments I recently filmed with Rob Carrick at the Globe and Mail, as part of his “Carrick Talks Money” personal finance series:

• In this video we talk about when a variable-rate mortgage does (and doesn’t) make sense in today’s environment.
• In this segment I explain why I don’t think our sub-prime lending is a major danger to Canada’s housing market, despite its negative stigma.

Five-year Government of Canada (GoC) bond yields fell by two basis points last week, closing at 1.00% on Friday. Five-year fixed-rate mortgages are offered in the 2.49% to 2.59% range, and five-year fixed-rate pre-approvals are available at rates as low as 2.69%.

Five-year variable-rate mortgages are available in the prime minus 0.65% to prime minus 0.80% range, depending on the terms and conditions that are important to you.

The Bottom Line: GoC bond yields settled down late last week and we narrowly avoided an increase in five-year mortgage rates. That said, the five-year GoC bond yield has been on an upward march for the past month and if that momentum continues, five-year fixed rates will move higher in short order. Stay tuned.

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Do Current U.S. and Canadian Employment Trends Mean Higher Fixed-Mortgage Rates are Imminent? Monday Morning Interest Rate Update (May 11, 2015)

by Dave Larock

Mortgage Rate ConceptLast week we received the latest Canadian and U.S. employment reports and both offered useful information for anyone keeping an eye on Canadian mortgage rates.

Here are my key takeaways from the Canadian employment data for April:

  • Our economy lost a total of 19,700 jobs last month, although this was due to a huge decline in part-time jobs (66,500) which was partially offset by a nice pick-up in higher quality full-time jobs (46,000).
  • The private sector added 24,200 new jobs, and interestingly, the self-employment sector shed 24,100 jobs over the same period. It is widely believed that the self-employed sector of our labour force contains a subset of would-be private sector workers who are actually unemployed but prefer to call themselves self-employed instead. Last month’s almost perfect correlation between gains in the private sector and losses in the self-employment sector appears to support this belief.
  • Most of the job losses were in retail (20,500), which doesn’t come as a surprise after the announcement of some large retail store closings like Target and Future Shop and in the construction sector (28,400), which won’t give our policy makers too much cause for concern if it signals slowing momentum in our housing sector.
  • Our manufacturing sector added 10,400 new jobs last month and this will be taken as an encouraging sign that the cheaper Loonie is helping our exporters gain more traction. Also, manufacturing-sector growth fuels job creation in other areas of the labour market, so this is a positive development for overall economic growth.
  • Average hours worked rose by 0.3% and average hourly wages grew by 0.6% last month. So while our overall economy shed jobs in April, those Canadians who were still gainfully employed worked longer hours and enjoyed a nice bump in their earnings, which have now risen by 2.3% on a year-over-year basis. When we compare that growth to our inflation rate of 1.2% over the same period (as measured by the Consumer Price Index), we see an encouraging uptick in the purchasing power of the average Canadian worker.

While our headline job growth was negative last month, there were some small but encouraging signs in our latest employment data. That said, a broader look at our longer-term job growth trend shows that our economy has added a monthly average of only 2,600 new jobs over the most recent six months, and that was with a surprising expansion in Alberta’s workforce in April. As such, I would interpret the bright spots in the latest employment data as silver linings in the development of our still cloudy overall job-market.

Here are my key takeaways from the U.S. employment data for April: read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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26.2 Miles Later – Monday Morning Interest Rate Update (May 4, 2015)

by Dave Larock

Today’s post will be shorter than normal because instead of writing yesterday I participated in the 35th running of the GoodLife Toronto marathon.

I would love to write more about my experiences as a runner over the past five years, which have been incredibly enlightening, challenging and rewarding. Alas, if I could find a twenty-fifth hour in the day!

Five-year Government of Canada (GoC) bond yields rose by eighteen basis points last week, closing at 1.05% on Friday. Five-year fixed-rate mortgages are offered in the 2.44% to 2.59% range, and five-year fixed-rate pre-approvals are available at rates as low as 2.69%.

Five-year variable-rate mortgages are available in the prime minus 0.65% to prime minus 0.80% range, depending on the terms and conditions that are important to you.

The Bottom Line: If the five-year Government of Canada bond yield continues to head higher this week we may start to see lenders raise their five-year fixed rates. Stay tuned.

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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What Every Canadian Borrower Needs To Know About Fixed-Rate Mortgage Penalties (April 27, 2015)

by Dave Larock

Mortgage Rate ConceptLast week was a relatively calm one for mortgage rates so today, I will interrupt our regularly scheduled interest-rate commentary to update a very important subject I covered in an earlier post on how fixed-rate mortgage penalties are calculated.

This often overlooked detail can, and often does, have a huge impact on your overall borrowing cost and unsurprisingly, the lenders who charge the highest penalties haven’t been going out of their way to warn you about them. As you will see, there is a reason that the small print is small. read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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What the Bank of Canada’s Latest Economic Commentary Means for Canadian Mortgage Rates – Monday Morning Interest Rate Update (April 20, 2015)

by Dave Larock

Mortgage Rate ConceptThe Bank of Canada (BoC) left its overnight rate unchanged last week as expected and it also released its Monetary Policy Report (MPR). This is an important document for anyone keeping an eye on Canadian mortgage rates because it provides us with the Bank’s views on the state of our economy and includes projections for both foreign and domestic economic momentum over the next several years.

Here are five highlights from the latest MPR commentary on the state of the Canadian economy:

  • The Bank did not seem overly concerned about the spike in our core inflation rate to 2.4% in March, attributing this rise to the temporary “pass-through effects of the lower Canadian dollar and some sector specific factors.” Most importantly, the BoC expects that both our overall inflation and our core-inflation rates will trend toward its 2% target “on a sustainable basis” as our output gap closes “around the end of 2016”. (As a reminder, the output gap is the difference between our actual output and our maximum potential output. Interest rates would normally be expected to rise at or about the time when the output gap closes.)
  • The Bank now believes that the negative impact of lower oil prices on our economy was “more front-loaded” than it had originally predicted, but that “the total drag associated with the decline is expected to be about the same” as originally forecast. Somewhat more ominously, the BoC warned that “the full impact of the decline in oil prices has yet to show up in the employment statistics” and that there will be “important downside risks to oil prices” for the remainder of 2015.
  • The Bank recognized that the “temporary weakening in the U.S. economy early in the year” has slowed its hoped-for virtuous cycle, where our cheaper dollar fuels a rise in export demand, which triggers an increase in business investment, which then improves employment opportunities. That said, the latest MPR noted that “capacity pressures were more prevalent among export oriented firms” and that it expects improving U.S. economic growth will help re-establish this “natural sequence” by mid-2015, although with more support coming from rising export demand and less from an improvement in business investment. (The BoC “expects investment in the oil and gas sector to fall by about 30 per cent in 2015”, while investment outside of the oil and gas sector “is expected to increase by about 7 per cent per year, on average.”)
  • The Bank believes that its decision to cut its overnight rate by 0.25% in January “should help mitigate financial pressures in the household sector by cushioning the decline in income and employment caused by lower oil prices”. This seems like a stretch to me. Borrowing rates were already at near-record lows and banks passed only a partial 0.15% of that 0.25% rate discount to consumers, thus providing only a minimal offset to the more acutely felt impact of job losses and reductions in hours worked.
  • The Bank continued to believe that “a soft landing in the housing sector” is the “most likely scenario, although it believes that “elevated house prices and debt levels relative to income continue to leave households vulnerable”. More specifically, it highlighted “the adverse impact of the oil price shock in Alberta and continued robust price growth in Toronto and Vancouver” as its areas of most concern. That reads to me like a nudge to Federal Finance Minister Joe Oliver to consider another round of rules changes for mortgage underwriting, which have become a rite of spring in recent years.

Here are the highlights from the MPR’s commentary on the state of the world’s largest economies: read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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How Will The Latest Employment Data Affect Canadian Mortgage Rates? Monday Morning Interest Rate Update (April 13, 2015)

by Dave Larock

Mortgage Rate ConceptLast Friday we received the latest Canadian employment report, for March, and it showed that our economy grew by 28,700 new jobs last month.

This was an upside surprise when compared to the consensus economist estimate of “no change” for the month, although the details of the report were mixed: read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Were Last Week’s Canadian GDP Data “Atrocious” Or Not? Monday Morning Interest Rate Update (April 6, 2015)

by Dave Larock

Mortgage Rate ConceptLast week we received the latest Canadian Gross Domestic Product (GDP) data for January, and economists breathed a sigh of relief when the numbers showed a decline of only 0.1% for the month.

Market watchers had braced for the worst after Bank of Canada (BoC) Governor Poloz warned that growth in the first quarter of 2015 would look “atrocious” thanks to the unfolding oil-price shock. Since Central bankers are not known for hyperbole, when they use a strong adjective, markets take notice. (Merriam Webster’s online dictionary defines the word atrocious as “of very poor quality …  appalling … horrifying”.)

The question that followed the GDP data release was why Governor Poloz used such a strong descriptor to preface the release of a not-so-bad 0.1% GDP decline.

To start with, let’s look at a quick summary of the key concerns raised by Governor Poloz in that widely quoted interview in the Financial Post, which took place on March 30, 2015: read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Running Instead of Writing – Monday Morning Interest Rate Update (March 30, 2015)

by Dave Larock

Mortgage Rate ConceptThis post will be shorter than normal because, instead of blogging yesterday, I participated in the 121st running of the 30k Around the Bay Road Race in Hamilton, Ontario. This is the fifth year in a row that I have run this race, and with good weather and cheering crowds I managed to run a personal best. (My wife keeps reminding me that an update to the running section of this blog is long overdue!)

Five-year Government of Canada (GoC) bond yields rose by eight basis points last week, closing at 0.80% on Friday. Five-year fixed-rate mortgages are offered in the 2.54% to 2.64% range, and five-year fixed-rate pre-approvals are available at rates as low as 2.69%.

Five-year variable-rate mortgages are available in the prime minus 0.65% to prime minus 0.80% range, depending on the terms and conditions that are important to you.

The Bottom Line: GoC bond yields continue to hover near record lows and the Bank of Canada remains cautious about our economic outlook. Both factors suggest that our fixed and variable rates will stay low for the foreseeable future.

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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The Real Reason the U.S. Fed Is No Longer Going To Be “Patient” About Raising Its Policy Rate – Monday Morning Interest Rate Update (March 23, 2015)

by Dave Larock

Mortgage Rate ConceptLast Wednesday the U.S. Federal Reserve finally gave the markets what they had been nervously waiting for by removing the key word “patient” from its interest-rate policy guidance, but in my opinion, not for the reason that had long been expected.

Before we break down the Fed’s latest comments and I explain why I write that, let’s quickly review why what the Fed says matters to Canadian mortgage borrowers.

Canadian monetary policy is heavily influenced by U.S. monetary policy because our economies are deeply interlinked (we export about 80% of what we sell abroad into U.S. markets), because the U.S. economy is about ten times larger than ours, and because the Fed funds rate is essentially the global economy’s single most important interest rate (which I recently wrote about here).

There is always a delicate balance between the relative monetary policy positions of the Bank of Canada (BoC) and the U.S. Fed, and even subtle changes in our respective outlooks can influence the U.S/Canada exchange rate, which has its own profound impact on our economic momentum.

The most recent Canadian example of this phenomenon was seen when BoC Governor Poloz expressed repeated concerns about the negative impacts of sharply lower oil prices on the Canadian economy. His comments helped drive the Loonie lower, giving our exporters a competitive boost in the process.

Last week it was the Fed’s turn, as it offered markets its latest perspective on the strength of the U.S. recovery. Each Fed statement is carefully parsed by investors, who try to determine when it will finally begin to raise the funds rate from its current 0% to 0.25% range, where it has hovered since December 16, 2008. The funds rate is important because it acts as the base rate on which all other U.S. interest rates are either directly or indirectly based, so when it rises, almost all other U.S. rates would be expected to follow (along with rates in many other countries as well).

Investors have long expected that the Fed would first remove the word “patient” from its interest-rate guidance as an early-warning signal that its policy rate would begin to rise in the not-too-distant future. That expectation is based on precedent because in January of 2004, the Fed dropped the word “patient” from its forecast and then hiked its funds rate six months later.

Interestingly, the Fed did finally do exactly that last week. But in an unexpected twist, the tone of its overall communication was actually more cautious. So while the momentum of the stock and bond markets in the lead up to the Fed’s announcement last Wednesday was bearish, consistent with the removal of the word “patient” from its guidance, markets were quickly re-priced with a lower-for-longer interest-rate view immediately following the Fed’s actual announcement. Markets quickly lowered the odds of a September rate hike from 53% to 38%, and decreased the odds of a rate hike by year end from 77% to 64%.

Here are the key points from the Fed’s official statement along with the highlights from its latest U.S. economic forecast: read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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